Required minimum distributions (RMDs) loom for millions of seniors who have reached age 73. These distributions from retirement plans, such as IRAs, 401(k)s and 403(b)s, must be completed by year end. Avoid the holiday rush, and contact your retirement plan custodian now.
The rules are simple, but the penalties for failure to withdraw on time are huge — 25% of the amount that should have been withdrawn for 2024!
Here are a few things to keep in mind.
—Year-end balance. This year’s RMD is based on the total balance in all your retirement accounts at the end of last year — December 31, 2023. You’ll have to go back to those records as a starting point. And that task should serve as a reminder to total up your retirement account balances early in the new year, from your year-end 2024 statements — to calculate your 2025 RMD.
—Calculating your RMD. You can find RMD calculators at almost every financial services firm’s website. Or use this: www.calculator.net/RMD-calculator. You’ll input the year of your birth and the total value of your retirement accounts, and you will be asked if your spouse is the primary beneficiary. If so, you must include your spouse’s birth year.
Or you can ask the custodian of any of your retirement accounts to do the calculation for you. Just make sure you total up the 2023 year-end value of ALL your IRA accounts, so the calculation can be done properly. Note that 401(k) RMDs must be calculated and withdrawn separately from each of those accounts — unless you are still working for that employer, in which case no withdrawal is required.
—Where to withdraw. You can take all the money out of one retirement account — or take a portion out of several accounts — as long as they add up to the total RMD you calculated. Each RMD distribution will generate an IRS Form 1099-R to include with your taxes. And you’ll likely receive a RMD reminder from any IRA, which you can ignore if you took the distribution from a different account.
—Consider taxes. All the money you take out of a qualified retirement account via your RMD (or any other additional withdrawals) is added to your ordinary income — and taxed at your marginal tax rate. You might want to ask the custodian to withhold at least 20% (or more if you’re in a higher bracket) for taxes, so you don’t get a big tax bill at the end of the year. (Alternatively, you could file a quarterly estimated tax form during the year.)
—When to take your RMD. If you haven’t taken your 2024 RMD yet, now is the time. You should already have the required amount liquid in a money market inside your IRA. This is not the time to start market timing, hoping for more gains before selling stocks. Custodians will be inundated with RMD requests in coming weeks.
And plan ahead for next year. Since you can calculate your 2025 RMD in January, based on year-end 2024 account balances, your year-end 2024 statements will let you know the total you’ll need to withdraw by next December. That allows you to set up a monthly withdrawal plan with your custodian using your RMD as a sort of planned monthly income, spread throughout the year.
Remember, the total amount required to be withdrawn in 2025 isn’t going to change during the year because it is based on your 2024 account balance!
Knowing that 2025 obligation should also impact how you invest your retirement accounts in anticipation of next year’s withdrawals. The conservative way is to raise cash earlier in the year, and keep it in a money market fund inside your retirement account. If the market declines during the year, you won’t be forced to sell stocks or funds to get cash for your RMD.
One other important note: Once you’ve reached age 73, you won’t be able to roll over one retirement plan to another, unless you’ve already taken your RMD from that account.
You worked hard to accumulate your retirement dollars. Now plan smartly to take the distributions. And if you’re among the lucky few who don’t need the RMD money for everyday expenses, you can always put it in CDs or Treasury bills, to continue earning interest. That’s the Savage Truth.
(Terry Savage is a registered investment adviser and the author of four best-selling books, including “The Savage Truth on Money.” Terry responds to questions on her blog at TerrySavage.com.)