By Charles Thomas, CFP®, MBA

When we are younger, we are always excited for the big birthday milestones when we get new perks like 16 and driving, 18 and voting, and of course, 21 and being allowed to order a drink. After that, it’s pretty smooth sailing until hitting the big 40 or becoming eligible for Social Security. As seniors, an important birthday milestone to be aware of is the beginning of required minimum distributions (RMDs).

That’s the point you must begin taking distributions from your IRAs, 401(k)s, and other pre-tax retirement accounts. However, that birthday milestone has been a bit of a moving target recently. Before the Secure Act in 2019, the RMD age was 70½. Then, with the Secure Act that year, the age was changed to 72. After the expansion of the Secure Act in 2022 (aka “Secure Act 2.0”), the RMD age was raised to 73 years old—unless you were born in 1960 or later, in which case your RMD will not start until you reach 75.

A little more in-depth on required minimum distributions: Remember that IRA or 401(k) account you funded with all pre-tax money? The IRS says they have waited long enough and want to start taking their little slice of that money now. RMDs require you to begin withdrawing money from pre-tax accounts, and the distribution is taxable income to you, similar to earning a wage.

The withdrawal amount varies each year because it is based on the December 31 value of the previous year’s balance divided by a life expectancy factor that the IRS has developed. The life expectancy factor drops yearly, requiring you to take out a larger slice each year. The idea is that every year, you will be forced to take out more money from your account and pay a little more in taxes.

What if you don’t take out your RMD? The IRS levies a penalty against all or any portion of your RMD you don’t take. The penalty used to be 50% of your RMD amount, which could be quite expensive. After Secure Act 2.0, they lowered the penalty to 25%. However, if you correct the situation on your own within two years, the penalty is reduced to 10%.

No one wants to pay a penalty, so it’s necessary to take out the entire RMD amount in a timely manner. The first calendar year you turn 73 will be the first year you have to take out an RMD. For your first RMD, you are allowed to wait until April 1 of the following year to take it, but remember: You will have another RMD that same year, which means you would have two distributions in one year, increasing your tax liability that year.

An important distinction is that if you have a Roth IRA, you do not have to worry about taking an RMD because you have already paid taxes on the money inside the Roth account. That is a small advantage of a Roth conversion—moving IRA assets into a Roth IRA—but proceed with caution, as the strategy will increase your taxes in the year of the conversion.

Questions about your RMD? Drop a line to your Northstar advisor, and we’ll be happy to discuss it with you.