Be Aware of These 2025 New Regulations When Withdrawing RMD from Retirement Accounts

When you’re in the midst of holiday celebrations, thinking about your retirement plan may not be at the forefront of your mind. However, if you are approaching or have already reached the age of 73, there are some crucial decisions to be made regarding your retirement savings.

Upon reaching the age of 73, you are required to start taking the required minimum distributions (RMD) from traditional individual retirement accounts (IRA), 401(k), 403(b), and other retirement plans. RMD is the amount mandated by the Internal Revenue Service (IRS) that you must withdraw from these types of accounts to avoid tax penalties.

RMD is typically calculated by dividing the value of your tax-deferred IRA or retirement plan by the IRS-designated life expectancy factor.

You must take your first RMD by April 1st of the year following the year you turn 73. Subsequently, RMDs need to be withdrawn by December 31st each year. Each IRA account you own must have its RMD calculated separately, but you can aggregate the total amount across multiple IRAs or withdraw from just one IRA.

RMD does not apply to Roth IRA accounts unless inherited. Here is a list of some common plans affected by RMD:

The amount of your RMD depends on variables such as your age, IRS life expectancy factor, and beneficiary situation. However, you can easily calculate it as follows:

For example, if you are 75 years old and single with a traditional IRA balance of $1 million as of the previous December 31st, and with an applicable table showing a life expectancy of 24.6 years, dividing $1 million by 24.6 gives you $40,650, which is your RMD.

Remember, if you have multiple accounts, each account requires its own RMD calculation. However, you can combine these RMDs and withdraw the total amount from any one or a combination of your accounts.

Many retirement plan providers can assist in calculating RMDs for you and even set up automatic withdrawals to ensure compliance each year.

RMDs are considered as ordinary federal income for taxation purposes in the year of withdrawal. State taxes may also apply. Therefore, delaying your first RMD withdrawal may lead to unexpected issues.

If you turn 73 this year and opt to defer the initial RMD until April 1st of the following year, under current regulations, you would need to take two RMDs next year (one by April 1st and the other by December 31st). Drawing a significant amount of RMD funds all at once could push you into a higher federal income tax bracket.

This may impact how your Social Security benefits are taxed and the amount you pay for Medicare, as higher earners may be subject to additional premiums.

Hence, seeking guidance from a qualified tax advisor before making any RMD decisions can prove beneficial as they can tailor advice based on your specific circumstances.

If you fail to withdraw the full RMD amount by the applicable deadline, you could face a 25% excise tax on the partially or delayed withdrawn RMD.

Previously set at 50%, the penalty amount has decreased due to the “Secure 2.0 Act,” bringing crucial changes to retirement plans in 2025.

However, if you rectify RMD errors within two years according to IRS guidelines, the penalty may be reduced to 10%.

Fully omitting the penalty is possible if you can prove a missed RMD withdrawal was due to a reasonable mistake and corrective measures are being taken.

You can determine if you qualify for excusing or waiving excess tax by filling out Form 5329 and following the instructions provided in Part IX – Additional Tax on Excess Accumulation in Qualified Retirement Plans (Including IRAs).

If your employer-sponsored retirement plan is not a Roth plan, you typically need to begin RMD withdrawals following rules applicable to traditional IRA plans. However, some companies might allow you to delay RMD withdrawals from 401(k) or 403(b) if you are still working for the plan-holding entity and own less than 5% of the company’s total assets.

With inherited IRAs, RMDs depend on factors such as your relationship with the original account holder and the time of their passing.

The IRS offers detailed information, but let’s delve into what actions you can take if these standards apply to you.

First, it’s best to assess your relationship with the deceased individual.

As a spousal beneficiary, you have the most flexibility concerning inherited IRAs and handling RMDs. You can take the following steps:

You may delay RMDs until you’re 73 and calculate them using the appropriate IRS life expectancy table.

Non-spouse beneficiaries typically need to withdraw all funds within ten years of the original account holder’s passing. This is known as the 10-year rule.

Starting in 2025, most non-spouse IRA beneficiaries will need to distribute annually within this ten-year period if the original account holder reached RMD age before passing away.

However, non-spouse beneficiaries who are also considered “eligible designated beneficiaries” as per the IRS are exceptions to this rule. These exceptions include:

Eligible designated beneficiaries can opt for RMD withdrawals based on their life expectancy or adhere to the 10-year rule.

While RMDs do not apply to Roth IRAs, RMDs need to be withdrawn from funds inherited from a Roth account following general RMD rules for traditional (tax-deferred) accounts.

The rules behind inherited IRAs can be exceptionally convoluted and vary based on a myriad of circumstances. Seeking advice from a tax advisor before taking any actions with inherited IRAs is advisable.

IRAs and 401(k) plans, among other tax-deferred retirement accounts, are designed to help individuals save for a comfortable retirement while enjoying some tax advantages. However, the IRS does not allow individuals to indefinitely benefit from tax deferrals when funds are deposited into these accounts. This is why RMD rules exist – to mandate accountholders to eventually withdraw from these plans. By understanding these key rules and working with tax advisors, you can comply with RMD laws while optimizing your long-term retirement strategy.