One component of retirement that sometimes creeps up on someone is trouble for not making necessary withdrawals. It centers around your required minimum distributions (RMDs). Per the IRS, RMDs are the minimum amounts you must take out of your retirement accounts each year.
Read More: How To Protect Your 401(k) From a Stock Market Crash
Consider This: Avoid This Retirement Savings Mistake That’s Costing Americans Up To $300K
For someone who doesn’t take their RMDs, the penalties can be big. At the same time, there are ways to perhaps soften the blow to finances. Here’s a look at some things retirees should know about RMDs and penalties.
The Rules
For the most part, you must start taking withdrawals from your traditional IRA, SEP IRA, SIMPLE IRA and retirement plan accounts when you reach a certain age. That’s typically when you hit 73, but you can delay the first one until April 1 of the following year. So, if you turned 73 in 2024, you must take the first RMD by Apr. 1, 2025. The second RMD must be taken by Dec. 31, 2025.
For You: 5 Unusual Ways To Make Extra Money That Actually Work
The Amount
According to the IRS, a RMD is generally calculated for each of your accounts by dividing the prior Dec. 31 balance by a life expectancy factor from the IRS.
The Reason
Why are you required to make these withdrawals? The answer is pretty simple — RMDs force you to pay taxes on your savings for retirement that you’ve been growing tax-deferred.
The Penalties
Here’s an important part to understand: You can face some stiff penalties if you fail to follow the RMD rules. You may face a 25% penalty on the amount that should have been taken out.
As noted by SmartAsset, while this penalty is high, it used to be 50% in recent years. Further, you could find yourself pushed into a higher tax bracket if you fail to properly take care of your RMDs.
The Options
If you miss an RMD, you still may have some options. It may be helpful to contact a financial advisor for some advice.
If you correct the situation in a timely fashion, the penalty may be cut to 10%. You should also try to take the RMD as soon as possible, and it may be wise to contact the IRS to let them know what happened.
More From GOBankingRates
- Costco, Walmart and Other Stores With Perks Retirees Need To Be Taking Advantage Of
- I'm Retired and Regret Not Claiming Social Security at 65 -- Here's Why
- 6 Subtly Genius Moves All Wealthy People Make With Their Money
- 5 Low-Risk Ways To Build Your Savings in 2025
This article originally appeared on GOBankingRates.com: What Happens If You Don’t Take Your RMD? 5 Things Retirees Must Know
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
