What are Required Minimum Distributions?
Required Minimum Distributions (RMDs) are the IRS’s way of finally collecting tax on your pre-tax retirement money. SECURE Act 2.0 raised the start age to 73 (rising to 75 in 2033). They apply to Traditional IRAs, 401(k)s, 403(b)s, and similar pre-tax accounts. Roth IRAs are exempt during the original owner’s lifetime, and starting 2024, Roth 401(k)s are also exempt. The RMD is calculated by dividing your prior year-end balance by an IRS life-expectancy factor (about 26.5 at age 73). Miss an RMD and the penalty is 25% of the shortfall (down from 50% pre-SECURE 2.0), and can drop to 10% if corrected promptly.
At age 73 with a $1,000,000 Traditional IRA balance on December 31 of the prior year, your RMD is $1,000,000 / 26.5 = ~$37,735. You must withdraw at least that amount during the calendar year and pay ordinary income tax on it. Skip it and the IRS can demand $9,400 in penalty on top of the regular tax once corrected. Many retirees set up auto-distributions in November to remove the failure-to-act risk.
Waiting until December 31 to take the RMD and discovering your brokerage needs 5 business days to settle the trade. Take the distribution by mid-December at the latest, or set it up as an automatic monthly draw all year.
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