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What to Know About Taking Your 2023 RMD

Many retirees face Dec. 31 deadline to make mandatory account withdrawals

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One of the biggest benefits of traditional IRAs and 401(k)s is that they let you save and invest pretax money for retirement. But you can’t keep that money stashed and those taxes deferred forever. By law, you’re obligated to make annual withdrawals once you reach a certain age and to pay federal taxes on that income at your regular rate.

The SECURE 2.0 Act of 2022, a wide-ranging package of federal provisions designed to foster greater retirement saving, changed some of the regulations surrounding those withdrawals, called required minimum distributions (RMDs), including when you must begin taking them. If you’re confused about whether the changes affect you, here’s what you need to know.

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The RMD minimum age is now 73

Owners of traditional IRAs and workplace retirement accounts such as 401(k), 403(b) and 457 plans, SEP IRAs and SIMPLE IRAs must begin making annual withdrawals, at a minimum amount set by the IRS once they reach a certain age. In 2023, that age went up from 72 to 73. (RMDs are not required from Roth IRAs until the owner dies and passes the account to heirs. Starting with the 2024 tax year, the same will hold for Roth workplace plans.)

What hasn’t changed are the RMD deadlines. When you reach the minimum age, you can delay your first mandatory withdrawal until April 1 of the following year. From then on, you must take your annual RMD by Dec. 31.

What does that mean for 2023 RMDs?

Well, if you turned 73 in 2023, that means you turned 72 in 2022 and should have already been making required withdrawals. You had until April 1, 2023, to take your first RMD (for the 2022 tax year), and you must take another (for the 2023 tax year) by New Year’s Eve.  

If you turned 72 this year, you have until April 1, 2025, to take your initial RMD  — but you may not want to wait.

“I’m not a fan of delaying that first payment because then you have to take two in the following year,” says Judith Leahy, a senior wealth adviser for Citi Personal Wealth Management. Two RMDs in one year could lead to a sizable tax bill, she notes.

If you already were older than 72 at the start of 2023, nothing changes. You still must make your 2023 withdrawal by the end of the year.

Other deadlines may apply

Taking RMDs is not an instantaneous process. You typically request the distribution through your retirement plan provider or the financial services company that holds the account. You may have to fill out forms.

So, though you have until Dec. 31 to take your RMD (if it’s not your first one), financial firms often set earlier deadlines for clients to make RMD requests because they get inundated at the end of the year, says Timothy McGrath, managing partner of Riverpoint Wealth Management in Chicago.   

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“You need to be mindful of when those deadlines are,” he says.

If you fail to take your RMD, you’ll have to pay a penalty. SECURE 2.0 made it less costly than it used to be, cutting the penalty from 50 percent of the amount you failed to withdraw to 25 percent (and it could drop to 10 percent if you take the missed distribution in less than two years). But even with the lesser hit, McGrath warns against putting yourself at risk of taking it.

“You need to do whatever you can to get this done,” he says. “The earlier the better, because these things take time.”

RMD amounts are based on life expectancy

If you must take an RMD for 2023, the IRS determines the amount by dividing the balance of your qualifying retirement plan as of Dec. 31, 2022, by what it calls your distribution period. This is the maximum number of years distributions can be taken from the account, based on your estimated life expectancy.

You can determine your minimum withdrawal using AARP’s RMD calculator or do the math yourself by looking up your distribution period in the Uniform Lifetime Table in IRS Publication 590-B.

Say you’re 74 and had $200,000 in a traditional IRA at the end of 2022. According to the IRS, your distribution period is 25.5 years, so you must withdraw at least $7,843. (Different calculations apply in certain circumstances — for example, if the sole beneficiary of your retirement account is a spouse more than 10 years younger than you, or if you are the inheritor of a late spouse’s account.)  

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If you have multiple accounts, it doesn’t matter if you take the RMD from one account or divide the total amount among them. “In the eyes of the IRS, you have one account value,” says Mike Lynch, managing director of Applied Insights at Hartford Funds in Wayne, Pennsylvania. All that matters is that you take out the entire amount you owe.

You can spend, save or donate the money

As the name suggests, you have to take RMDs whether you need the money or not, but you have options on how to make the withdrawal and what to do with it, with different implications for your taxes and family finances. For example:

Use it for living expenses. Many retirees do need the money, as a primary source of income or to supplement Social Security benefits or a pension. In this case, you can simply take the RMD and put it in your checking or savings account to use for daily expenses, bills or holiday gifts, Lynch says.

Use it for your family. Some account holders use RMD income to give money to their children, Leahy says. Others might fund 529 plans for grandchildren or take out a life insurance policy that will benefit their family when they die. “There are all these different ways you can get pretty creative about it,” Leahy says.

Donate it. You can satisfy the RMD requirement by taking a qualified charitable distribution (QCD). Individuals 70½ or older can donate up to $100,000 per year and a couple can donate up to $200,000. 

You won’t be taxed on the withdrawal as long as the money goes directly from your retirement account to the charity of your choice. However, you won’t be able to deduct the QCD as a charitable donation. If, on the other hand, you collect the RMD then turn around and give it to charity, you will owe taxes but can deduct the charitable donation.

Reinvest it. You may want the money to continue reaping investment returns or to accumulate interest in a CD or high-yield savings account. If so, you can make the withdrawal and reinvest it, McGrath says. However, you’ll have to pay taxes on the money first.

Regardless of how you plan to use your RMD, talk to a tax professional about how much in taxes you may be on the hook for. If you’re not already doing so, you can ask the plan provider or financial services company that holds the account to withhold estimated taxes on distributions next year and beyond, as an employer might have withheld taxes from your paychecks.  

“What we’ve seen happen if clients aren’t prepared for some of this, is all of sudden there’s a big tax liability that they weren’t even thinking about,” McGrath says.

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