You May Be Forced to Tap Into Your Retirement Account in 2025: Here’s What to Know About RMDs

When you reach age 73, you need to start taking required minimum distributions from retirement plans. Hadayeva Sviatlana/Shutterstock

As you celebrate the holiday season, retirement planning may be the last thing on your mind. But if you’re turning 73 or already reached that milestone, there are some very important decisions you need to make about your retirement savings.

When you reach age 73, you need to start taking required minimum distributions (RMDs) from retirement plans such as traditional individual retirement accounts (IRAs), 401(k)s, and 403(b)s. An RMD is the amount of money the IRS requires you to withdraw from these types of plans in order to avoid a tax penalty.

You generally calculate your RMD by dividing the value of your tax-deferred IRA or retirement plan by a life expectancy factor as determined by the IRS.

You must take your first RMD by April 1 of the year after you turn 73. Afterward, you’re required to take RMDs each year by Dec. 31. You must calculate an RMD for each IRA you own separately. But you can divide up the total amount across multiple IRAs or take from just one.

RMDs don’t apply to Roth IRAs unless they’re inherited. Here’s a list of some common plans that RMDs affect:

• traditional IRAs
• SEP (simplified employee pension) IRAs
• SIMPLE (savings incentive match plan for employees) IRAs
• 401(k) plans
• 403(b) plans
• 457(b) plans

How to Calculate Your RMD

The amount of your RMD depends on a few variables including your age, IRS life-expectancy factor, and beneficiary situation. But you can follow these steps to make it simple:

• Start with your account balance on Dec. 31 of the previous year.

• Figure out your IRS life-expectancy factor (officially called the “distribution period”) on the IRS tables that apply to you.

• Divide account balance by distribution period.

Here’s an example: Suppose you are 75 and you’re single. Your traditional IRA balance as of Dec. 31 of last year was $1 million. According to your applicable table, your distribution period is 24.6. So divide $1 million by 24.6 to get $40,650. That’s your RMD.

Remember that if you have multiple accounts, you’d need to calculate an RMD for each. But you can combine these RMDs and take that amount from any one account or a combination of the ones you have.

Many retirement plan providers can calculate your RMDs for you and even help you set up automatic withdrawals in order to make sure you meet the requirements each year.

How Are RMDs Taxed?

RMDs are taxed as ordinary federal income for the year they were withdrawn. State taxes may also apply. So this may raise some unexpected issues if you decide to delay taking your first RMD.

Suppose you turned 73 this year and want to delay taking your first RMD until April 1 next year. Under the current rules, you’d need to take two RMDs next year (one by April 1 and another by Dec. 31). Because RMDs are taxed as ordinary income, withdrawing a large amount may push you into a higher federal income tax bracket.

This could impact how your Social Security benefits get taxed and the amount you pay for Medicare, as some high-earners need to pay surcharges on certain premiums.

So before you make any RMD decisions, it’s helpful to consult a qualified tax advisor who can provide individual guidance based on your unique situation.

What If I Miss an RMD?

If you fail to take your full RMD by the applicable deadline, you’d face a 25 percent excise tax on partial or late RMD withdrawals.

The penalty amount was reduced from 50 percent thanks to the Secure 2.0 Act, which will bring some key changes to retirement plans in 2025.

But if you correct your RMD error within two years based on IRS guidelines, the penalty could be reduced to 10 percent.

The IRS could also waive the penalty entirely if you prove missing an RMD was due to a reasonable error and you’re taking steps to fix it.

You can see if you’re eligible for an excise tax reduction or waiver by filling out Form 5329 and following the Form 5329 instructions listed under “Part IX—Additional Tax on Excess Accumulation in Qualified Retirement Plans (Including IRAs).”

How Do RMDs for 401(k)s Work?

If you have an employer-sponsored retirement plan that’s not a Roth plan, you typically need to start taking RMDs based on rules that apply to plans such as traditional IRAs. However, some companies may allow you to delay taking RMDs from your 401(k) or 403(b) if you’re still working for the company that holds your plan and you do not own more than 5 percent of the business you work for.

But all plans are different, so it’s important to check with your benefits department.

How Do RMDs Work for Inherited IRAs?

RMDs for inherited IRAs depend on several factors such as your relationship to the original account holder and when they passed away.

The IRS provides detailed information, but let’s take a look at what you can do assuming this criteria applies.

• The original account holder died after 2019.
• The original account holder passed away before being required to take RMDs.

Moving forward, it’s best to start by looking at your relationship to the deceased.

Spouse

As the spousal beneficiary, you have the most legroom when it comes to inherited IRAs and how to handle RMDs. Here’s what you can do.

Rollover Assets Into Your Own Roth IRA

You can delay taking RMDs until you are 73 and calculate it using your applicable IRS life expectancy table.

Set Up a New Inherited IRA

In this case, you have the following options.

• Delay distributions until the original account holder would have turned 72.
• Take distributions based on your own life expectancy.
• Withdraw all funds within 10 years.

Non-Spousal Beneficiary

If you’re not the spouse of the original account holder, you generally need to withdraw all funds within 10 years after the death of the original account holder. This is known as the 10-year rule.

And beginning in 2025, most non-spousal IRA beneficiaries must take annual distributions within that 10-year period if the original account holder had reached RMD age before passing.

However, exceptions apply for non-spousal beneficiaries who are also “eligible designated beneficiaries” as defined by the IRS. These include the following:

• Minor child of the original account holder
• Disabled or chronically ill individual as defined by the IRS
• Individual who is not more than 10 years younger than the IRA owner or plan participant

Eligible designated beneficiaries may take RMDs based on their life expectancy or follow the 10-year rule.

And even though RMDs don’t apply to Roth IRAs, you’d need to take RMDs from funds you inherited from a Roth account. In this case, the general RMD rules for a traditional (tax-deferred) account apply.

The rules behind inherited IRAs can be immensely complex and vary depending on an array of circumstances. Before you do anything with an inherited IRA, it would be beneficial to consult a tax advisor.

The Bottom Line

Tax-deferred retirement plans such as IRAs and 401(k)s were designed to help individuals save for a comfortable retirement while enjoying some tax advantages. But the IRS won’t let people benefit from tax breaks indefinitely while money is in these types of accounts. That’s why there are RMD rules, which require savers to make withdrawals from these plans eventually. But by understanding the key rules and working with a tax adviser, you can satisfy the RMD laws and stay in line with your long-term retirement strategy.

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