Are you aware of the requirement to withdraw a specific amount from your pre-tax retirement account(s) at age 73?
RMD is an acronym for Required Minimum Distributions which are withdrawals you must take out of your pre-tax retirement account (ie: traditional IRA, 401(k), etc) annually after you reach age 73. Prior to Secure Act legislation, the RMD age was age 70 ½, then age 72. After Secure Act 2.0, the RMD age became 73. Your RMD amount is based on your age, the cumulative balance of your retirement account(s) as of Dec 31 of the preceding year, and an IRS life expectancy table.
Why is a distribution from your retirement account required? The IRS requires distributions to have an opportunity to tax money that was previously untaxed. Presumably, money that went into your retirement account(s) went in pre-tax and you received a tax benefit (either reduced income tax or tax deduction). Based on your income and tax bracket, you may be required to pay taxes on the RMD which may be taxed at your ordinary income tax rate.
What happens if you don’t withdraw your RMD in full? Prior to the passing of Secure Act 2.0 legislation, you may have been required to pay a 50% excise tax on the amount left behind. Now, due to the new legislation, that amount has been reduced to 25% or, if the RMD is corrected within 2 years, 10%.
What can you do? If you have one or multiple retirement accounts and you are 72+ years old, reach out to your financial advisor, financial planner, or tax advisor before Dec 31 and ask: when do I need to withdraw money from my retirement account(s) to satisfy my RMD?
Wendolyn Forbes is a CERTIFIED FINANCIAL PLANNER™ with Wealth Transition Finance, A Member of Advisory Services Network, LLC. Wendolyn is a fee-only financial planner and member of the National Association of Personal Financial Advisors (NAPFA).
CFP Board owns the marks CFP®, CERTIFIED FINANCIAL PLANNER™, and CFP® (with plaque design) in the U.S.
This material is provided as a courtesy and for educational purposes only. Advisory Services Network, LLC does not provide tax advice. The tax information contained herein is general and is not exhaustive by nature. Federal and state laws are complex and constantly changing. Consult your own legal or tax professional for information concerning your individual situation.
Originally published in the December 2023 issue of Positively Haywood by Vicinitus.