As we continue to head towards the end of the calendar year it’s important to understand what an RMD is and how it may affect you.
What is an RMD?
RMD’s or Required Minimum Distributions is the minimum amount that the IRS requires you to withdrawal from your retirement account at each age.
When are RMD’s required?
Once you hit 73 you must begin withdrawing from tax deferred retirement accounts. These are accounts such as IRAs, SEP IRAs, Simple IRAs, and most employer sponsored retirement plans such as a (401(k) and 403(b). In 2024, the SECURE Act 2.0 eliminated RMD’s for Roth 401(k)s and Roth 403(b)s bringing them in line with Roth IRAs. Starting in 2033, the RMD age limit increases to 75 years old for anyone born after January 1st, 1960.
How do you determine the amount to withdraw?
RMD’s amounts vary depending on few different factors:
- Age
- Retirement account balance
- The IRS life-expectancy factor for your age
How long do you have to take out an RMD before facing a penalty?
If you have not taken an RMD in the past and are 73, you have until April 1st of 2026 to do so before facing penalty. However, if you are over age 73 and have taken an RMD in the past you have until December 31st of this year.
What is the penalty for failing to take an RMD?
Failure to take to RMD penalties are quite hefty and are 25% of what was supposed to be withdrawn.
For example:
If your RMD for 2025 was supposed to be $50,000. Up to 25% of that or $12,500 is penalized, On top of that. All of that money then counts as taxable income and is taxed under your normal tax rate as well.
Strategies for RMD’s
One way we plan for RMD’s is by using a QCD or Qualified Charitable Distribution. QCD’s are a direct transfer of funds from a retirement account to a qualified public charity. The most you can donate in 2025 is $108,000 per person per year.
QCD’s provide multiple tax benefits, such as:
- QCD’s do not count towards your AGI, which can help lower tax on social security benefits
- Reducing Medicare premium surcharges (IRMAA)
- Many tax credits and deductions phase out at certain AGI’s such as the new senior deduction introduced in the OBBBA. By using a QCD, these help maintain eligibility for these tax breaks.
- It’s difficult at times for taxpayers to itemize. If you take the standard deduction but still make large charitable donations, you may not receive any tax benefit for those contributions, making a QCD guarantees tax benefit.
Calculating the exact amount of an RMD can be difficult, be sure to consult your financial advisor or HD Growth Partners team as soon as possible to help calculate how much you need to take out before you face penalties. For help going forward and management of RMD’s talk to your HD advisor about tax planning services.