If you’ve spent decades carefully saving for retirement, the last thing you want is an avoidable tax penalty eating into your nest egg. Yet every year, retirees pay unnecessary penalties simply because they didn’t fully understand Required Minimum Distributions — better known as RMDs.
Let’s break down what RMDs are, how they work, and what happens if you miss one.
What Are RMDs?
Required Minimum Distributions (RMDs) are the minimum amounts you must withdraw each year from certain retirement accounts once you reach a specific age.
Under current law, most individuals must begin taking RMDs at age 73 (age 75 if you were born in 1960 or later).
RMDs generally apply to:
- Traditional IRAs
- SEP and SIMPLE IRAs
- 401(k), 403(b), and other employer-sponsored retirement plans
Roth IRAs do not require RMDs during the original owner’s lifetime.
The IRS requires these withdrawals because your retirement accounts were funded with pre-tax dollars. At some point, the government wants to collect the taxes deferred over the years.
How RMDs Are Calculated
Your RMD amount is based on:
- Your account balance as of December 31 of the previous year
- A life expectancy factor from IRS tables
The formula is straightforward:
Prior year-end balance ÷ IRS life expectancy factor = Your RMD
Each year, the percentage you must withdraw increases slightly as your life expectancy factor declines.
When Do You Need to Take Them?
Your first RMD must be taken by April 1 of the year after you turn 73 (or 75, depending on birth year). After that, RMDs must be taken by December 31 each year.
However, delaying your first RMD until April 1 can create a tax issue — because you’ll then need to take two distributions in the same calendar year, potentially pushing you into a higher tax bracket.
This is where strategic planning matters.
What Happens If You Don’t Take Your RMD?
The penalty for missing an RMD used to be one of the harshest in the tax code.
Under updated rules, the penalty is:
- 25% of the amount you failed to withdraw
- Reduced to 10% if corrected in a timely manner
Example:
If your RMD was $20,000 and you failed to take it, you could face a $5,000 penalty — in addition to the income tax owed on the distribution.
While the IRS may waive penalties in certain situations, it requires filing additional forms and demonstrating reasonable cause. It’s far easier (and less stressful) to plan ahead.
The Common Mistake Retirees Make
The most common mistake isn’t missing an RMD entirely.
It’s treating it as a checkbox exercise instead of a strategic planning opportunity.
Without coordination, retirees often:
- Take more income than necessary
- Trigger avoidable Medicare premium increases
- Miss tax-saving windows earlier in retirement
RMDs are mandatory — but how you plan around them is not.
Don’t Navigate RMDs Alone
If you’re approaching RMD age, already taking distributions, or simply want clarity about how they fit into your retirement plan, now is the time to get proactive.
Reach out to Darrin at Evergreen Wealth Advisors to discuss your next steps and gain clarity on your questions. A thoughtful strategy today can help protect what you’ve worked so hard to build.
Planning isn’t just about compliance — it’s about confidence.