Why does the government make you take an RMD?
Asked by: Prof. Arch Hyatt | Last update: November 10, 2025Score: 4.2/5 (41 votes)
Why RMD is mandatory?
Why do RMDs exist? If you've been setting aside part of your earnings in an IRA or 401(k) or other tax-advantaged retirement account, you haven't paid income tax on those dollars. The government lets you delay paying taxes, but RMDs are how the government ensures you'll eventually be taxed.
Who is exempt from RMD?
The RMD rules also apply to traditional IRAs and IRA-based plans such as SEPs, SARSEPs, and SIMPLE IRAs. The RMD rules do not apply to Roth IRAs or Designated Roth accounts while the owner is alive. However, RMD rules do apply to the beneficiaries of Roth IRA and Designated Roth accounts.
Is there any way to avoid RMD?
If you have assets in a tax-deferred account, you could avoid RMDs and their associated taxes by rolling the balance into a Roth IRA. This is done through a Roth conversion in which you essentially turn tax-deferred assets into tax-free ones.
What happens if I did not take the required minimum distribution?
Additional tax for not taking an RMD timely
For 2023 and subsequent year RMDs, IRA owners and IRA beneficiaries are subject to a 25 percent additional tax on an amount not taken, with the potential to have the tax reduced or waived entirely.
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What is the biggest RMD mistake?
Not taking your RMDs as scheduled
The biggest mistake you can make is not taking your RMDs as you're supposed to. Typically, you must take your RMDs by Dec. 31, but you have until April 1 of the following year to take your first RMD. So, if you turned 73 in 2024, you have until April 1, 2025, to make your 2024 RMD.
At what age does RMD stop?
The SECURE Act of 2019 increased the RMD age from 70½ to 72 years. Now the SECURE 2.0 Act of 2022 is once again delaying the RMD age—from 72 to 73—starting in 2023. And wait, there's more. In 2033, the RMD age will increase to age 75.
What are the new rules for RMD in 2024?
IRAs: IRA withdrawals from traditional IRAs and IRA-based plans occur every year once people reach age 73, even if they're still employed. IRA owners who reach age 73 in 2024, however, have until April 1, 2025, to take their first RMD based on their account balance on Dec. 31, 2023, and the second RMD is due by Dec.
What is the disadvantage of RMD?
If you take your RMD early in the year, there's a risk that you will spend the portion of that money that you will later need to pay taxes. (This ultimately depends on how you structure your account, as some retirement accounts will automatically withhold taxes on your behalf.)
What is the RMD tax bomb?
If you only (or mostly) contribute to Traditional IRA and 401(k) accounts in your working years, you may be creating a “tax bomb” for your retirement, as you will eventually have to pay income taxes on withdrawals from these accounts, either when you need the funds for spending or when the government requires you to ...
Which is correct if a taxpayer does not take an RMD?
The Bottom Line. A required minimum distribution (RMD) is the amount you must take from pre-tax retirement portfolios each year. If you do not take out your withdrawal by December 31, you will owe up to a 25% excise tax on the amount you do not withdraw.
What is the 4% rule for RMD?
The 4% rule says people should be able to withdraw 4% of their retirement funds in the first year after retiring and take that dollar amount, adjusted for inflation, every year after for approximately 30 years.
How much would RMD be on $500,000?
According to the Uniform Lifetime Table, a 75-year-old should use a distribution period of 24.6 years when calculating an RMD. So you'd simply divide the year-end balance by this factor. Dividing $500,000 by 24.6 years gives you an RMD of $20,325.
At what age is IRA withdrawal tax-free?
If you wish to withdraw your earnings from a Roth IRA without paying taxes, you must be 59½ and must have held the Roth IRA for at least five years. Exceptions to these requirements include: Becoming disabled and needing the funds to live on. Needing Roth funds of up to $10,000 to buy your first home.
What is the RMD for $1 million?
So, for example, say you had $1 million in your retirement account at the end of 2024. Depending on your age, this is what your RMD for this year would look like (rounded to the nearest dollar). Data source: IRS. If you're 73 years old, then, dividing $1 million by 26.5 will give you an annual RMD of $37,736.
Who is exempt from RMDs?
As of 2024, Roth accounts, including Roth 401(k)s, are exempt from RMDs, although 2023 RMDs due by April 1, 2024, are still required for Roth 401(k)s. One of the advantages of a Roth account is that they're not subject to the same RMD rules as other tax-deferred retirement accounts.
Can RMD be avoided?
Rollover to a Roth Account to Avoid RMDs
Assuming you are 59½ or older and have owned at least one Roth IRA for at least five years, the money rolled to the Roth IRA can be tapped tax-free. Another solution to avoid RMDs would be to convert traditional IRA money to a Roth IRA.
Why is RMD a problem?
Some people, typically those with a lot of other income in retirement from pensions or those who have fully depreciated rental properties and those who are super savers, actually do have what I call “an RMD problem.” I define an RMD problem as someone who takes out their RMDs and pays taxes at a higher rate than they ...
What do most people do with their RMD?
Use your RMDs for living expenses
Many retirees use RMDs to cover routine expenses. Using the funds you worked so hard to save for your retirement lifestyle is a worthy goal, especially if you don't expect to be in a higher tax bracket during retirement since RMDs are taxed as ordinary income.
Is it better to take RMD monthly or annually?
Whether to take your RMD monthly or annually depends on your needs and preferences. Monthly: Provides a regular income stream, which can be helpful for budgeting and managing cash flow. Annual: Allows your investments more time to grow tax-deferred within the account.
Will RMDs be eliminated?
IRS Eliminates 2024 RMDs for IRA Beneficiaries Subject to 10-Year Rule. IRS Notice 2024-35 eliminates 2024 required minimum distributions (RMD) for beneficiaries that would have otherwise been required to take one under the SECURE Act of 2019's 10-year rule.
How much of my RMD is taxable?
How are RMDs taxed? If all your IRA contributions were tax-deductible when you made them, the full amount of the RMD will be treated as ordinary income for the year in which you take it. If you also made nondeductible contributions to your IRAs, some of the amount won't be subject to income taxes.
How to avoid taxes on RMD withdrawal?
Delaying retirement, converting to a Roth IRA, limiting the number of initial distributions, and making a qualified charitable distribution (QCD) are four strategies that can help reduce the tax exposure that comes with RMDs.
What is the 10-year rule?
The 10-year rule requires that all assets in the inherited IRA must be fully withdrawn by the end of the 10th year following the original IRA owner's death. (If the death occurred in 2019 or earlier, the 10-year rule was a five-year rule.)
What year could you skip RMD?
The IRS has waived RMD requirements from inherited IRAs for 2024. Here's how to decide whether you should take or skip the withdrawal. With a few notable exceptions,1 most nonspouse beneficiaries who inherit a traditional IRA after 2019 must deplete the account—and pay taxes on those funds—within 10 years.