Required Minimum Distributions (RMDs): Uncle Sam Wants His Cut
You can't defer taxes forever. Eventually, the government forces you to take money out of your traditional retirement accounts.
The Rules
Starting at age 73 (part of SECURE Act 2.0 changes), you must withdraw a calculated minimum amount from your Traditional IRAs and 401(k)s each year.
How it's Calculated
The amount is based on your account balance at the end of the previous year divided by a life expectancy factor from IRS tables. As you get older, the percentage you must withdraw increases.
The Penalty
If you fail to take your RMD, the penalty is severe: up to 25% of the amount you should have withdrawn. It's crucial to automate this or double-check with your custodian.
Strategic Planning
Large RMDs can push you into a higher tax bracket and increase your Medicare premiums (IRMAA). Consider doing Roth Conversions in your 60s to lower your traditional balances before RMDs kick in.
Real Life Examples
Mrs. Williams
Teacher . $60k . 20% Savings
She did Roth conversions in her early 60s when she was in a low tax bracket. Now at 73, her required withdrawals from her Traditional account are small, so she avoids a massive tax spike in her 70s.
Mr. Johnson
Average Joe . $90k . 10% Savings
He has a large Traditional 401(k). He'll have to take out about $35,000 for his first RMD. He doesn't need the money for living expenses, so he'll pay the taxes and reinvest the remainder in a taxable account.
Mr. Smith
Mr. Popular . $120k . 5% Savings
He forgot about his RMD until his accountant mentioned it in. He missed the deadline and had to pay a $5,000 penalty—money that could have easily been saved with a little automation.
Learn More
Stay compliant with IRS rules:
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