What Is the Rule of 55 and How Does It Work?

Required minimum distributions (RMDs) are mandatory withdrawals from certain tax-deferred retirement accounts. They apply to traditional IRAs, SEP IRAs, SIMPLE IRAs, and most 401(k)s and 403(b)s. RMDs, which are taxed as ordinary income, will likely affect your taxable income and maybe even your Medicare premiums.

To calculate your RMD, you’ll divide your account balance by your associated life expectancy factor – a figure that can be found on one of three IRS tables that correspond with your relationship to the account holder.

Understanding RMDs

The rules surrounding RMDs from retirement accounts have changed in recent years, impacting when and how much you need to withdraw. The SECURE 2.0 Act increased the RMD age to 73 for those turning 72 in 2023 and beyond. However, the RMD age will eventually increase to age 75 for anyone who turns 74 after Dec. 31, 2032.

Your first RMD must be taken by April 1 of the year following the year you reach RMD age. Failing to take the correct RMD amount can result in a hefty penalty from the IRS. However, you can take RMDs in increments throughout the year as long as the total amount is withdrawn by December 31.

Special RMD Considerations

There are exceptions and specific rules that apply to certain scenarios when it comes to RMDs, such as:

If you’re still working past the age of 72 or 73 (depending on your RMD age), and you don’t own more than 5% of your company, you can delay RMDs for your current employer’s plan until retirement.

Non-spouse beneficiaries of inherited IRAs are subject to a 10-year payout rule, with some exceptions for minors, disabled individuals, and others.

Take Action

Each year, clearly understand your RMD amounts and the deadline for taking them.

Always take your RMDs on time to avoid IRS penalties and other issues.

To minimize or avoid RMDs, consider an immediate or gradual rollover of your traditional IRA or 401(k) into a post-tax Roth IRA. However, you’ll want to calculate whether or not this is actually a worthwhile move based on your age and situation. RMD questions? I’m here to help. Schedule a quick call