The IRS requires retirees to start taking Required Minimum Distributions (RMDs) from their retirement accounts at age 73. The amount that must be withdrawn each year is calculated by dividing the account balance at the end of the previous year by the retiree’s remaining life expectancy. For example, if a retiree has $100,000 in their retirement account at the end of 2024 and is 73 years old, their RMD for 2025 would be $3,774.
This amount increases as the retiree ages, with the RMD being $3,922 at age 74 and $4,066 at age 75. It’s important for retirees to understand their income needs and create a withdrawal strategy that minimizes taxes and avoids penalties. This may involve starting with taxable accounts before moving to tax-deferred accounts and saving Roth IRAs for last to allow for tax-free growth.
Required minimum distributions explained
Retirees should also be aware of the tax implications of their withdrawals. Traditional IRAs and 401(k)s are generally taxed as ordinary income, and retirees under 59 1/2 may pay an additional 10% penalty unless exempted by certain conditions.
Roth IRAs offer tax-free withdrawals if the account is over five years old and the retiree is over 59 1/2. In addition to understanding RMDs and creating a withdrawal strategy, retirees should also stay informed about changes to retirement account regulations. Starting in 2025, RMD regulations applied to Roth funds within 401(k) or 403(b) plans, but beginning in 2024, these accounts will not be subject to RMDs as long as the account owner is still living.
Retirees are advised to consult with financial advisors to navigate these changes effectively and ensure they are making informed decisions about their retirement savings.