Required minimum distributions (RMDs) are a fact of life for most Americans once they reach the age of 73 — and while many retirees may welcome the additional income from the mandatory annual withdrawals, what happens if you don’t actually need the funds just yet?
Essentially, an RMD is an annual withdrawal from a pre-tax retirement account, mandatory under Internal Revenue Service (IRS) rules. These include 401(k)s, 403(b)s, 457s, the government TSPs, and traditional IRA accounts.
As always, RMDs are due at the end of the year — December 31, to be exact. Should you fail to take out the minimum distributions by that date, the IRS will penalize you with a special excise tax — but more on that in a minute.
Let’s say you’re 73 years old and enjoying a comfortable retirement — but you don’t technically need the funds you’re required to withdraw from your pre-tax accounts. So, what can you do? Fortunately, there are a few savvy ways to make the funds work for you.
Here’s what you need to know about required withdrawals from your investment accounts — along with tips on how to handle the cash if you don’t need it in the immediate future.
When you put money into a 401(k) or a traditional IRA, you get to deduct your contributions from your income, so you’re investing with untaxed money.
Once it’s invested, your money will grow and you won’t have to pay taxes on the gains either.
At some point, though, the government will want its cut. As per the IRS rule, you must annually withdraw a minimum amount from every tax-deferred retirement account you own.
To ensure you actually make withdrawals — and don’t just let your money sit in your account forever — the government requires you to start taking some money out when you reach the age of 73 (if you hit that age after December 31, 2022 — otherwise, it’s even earlier).
The “magic number,” as it were, that you must withdraw is based on the total value of the account at the end of the previous year and a figure referred to as a “life expectancy factor.”
So, RMDs for the current year are calculated based on the account balance as of December 31, 2023. If you don’t take an RMD, or take a distribution that is below the required amount, the penalties can be steep.
