Preparing for an Important Retirement Financial Milestone in 2025

There are many retirement financial milestones to pay attention to: your penalty-free early distribution age from an IRA (59/12), eligibility for Social Security (early filer at 62 and full retirement age at 66–67), Medicare eligibility (age 65, for most), and your RMD age (currently 73; 75 beginning in 2033).

I’ve already hit all those milestones except for one: my RMD age. (Some may view it more as a pothole than a milestone on their retirement journey.)

But that will happen this year when I turn 73. The IRS requires me to start taking Required Minimum Distributions (RMDs) from my Traditional (i.e., taxable on withdrawal) IRA retirement account.

In other words, it’s the year the IRS says, “Okay, you’ve had a good ride, so now it ‘s our turn—pay up.” Fortunately, they don’t take it all at once but want a little more each year.

The title of this article is basically the same as the subject of an email I recently received from Fidelity, my IRA account custodian. The text of the email said the following:

”In the year you turn 73, you may have to begin taking required minimum distributions (RMDs) from your tax-deferred retirement accounts, such as IRAs and 401(k)s. Although RMD rules can be complicated, it’s important to follow them because the Internal Revenue Service can impose a penalty of 25% of the required amount you don’t withdraw on time. That’s why we want to help you understand everything involved—including how much you’ll need to take out and key deadlines to meet.”

Fidelity knows I will turn 73 this year and have a Traditional IRA, and RMDs apply to me. They obviously don’t want me to forget—a reminder even shows up on my account summary when I log in. (I appreciate their concern, but this may mainly be a compliance thing that the government requires—I think Fidelity would rather that money stay in my account.)

I remember being glad to learn that SECURE Act 2.0 had raised my RMD age to 73. But in reality, it’s of little consequence to me since I have effectively already been taking RMDs since I retired five years ago. The IRS has already been getting its due.

I was also encouraged by the IRS’s publication of updated life expectancy tables, which were effective on January 1, 2022, and are still in effect. The new tables reduced the RMDs for most ages based on longer life expectancies in general.

That doesn’t mean I don’t need to think about this; I still have some work to do to answer the two questions that Fidelity raised and one additional: 1) What are the key deadlines I need to know about (especially when I have to start making RMDs); 2) How much do I need to take out?; and, 3) What are the tax implications?

Plus, I’ll need to calculate the minimum RMD I have to take, less QCDs and taxes, to satisfy the IRA requirement. Failing to follow the IRS rules can result in significant penalties: 25% of the amount not taken on time—plus any taxes due—for a missed RMD. But first things first.

When specifically do I have to start taking RMDs?

This seems moot since I am already taking the rough equivalent of an RMD. Of course, I’ll have to make sure I withdraw the correct amount, but the answer is not what people intuitively think, for example, ”after I turn 73.”

It’s a little more complicated than that. According to Fidelity,

”The year you turn 73, you have a one-time option to delay my first RMD until April 1 of the following year. But if you chose to delay, you’ll need to take your second RMD by the end of that same calendar year. All other years afterward, your deadline is December 31.”

This is irrelevant to me but not to someone who doesn’t need (or want) to take RMDs but has reached RMD age (now 73 for most, but 75 for those born in 1960 or later; someone born in 1960 will be 65 next year and won’t have to take RMDs until 2034 when they turn 75) and has some decisions to make.

Delaying would give you extra time to make plans for the additional income (perhaps reinvesting it, but you can’t move it to another IRA) and to assess the tax implications (there’s always the possibility they will push you into a higher marginal tax bracket).

However, if you delay, you may inadvertently push yourself into a higher tax bracket. Remember, the RMDs are fully taxable, your Social Security could mostly be, and most pensions and annuities are also, so your aggregate income and tax numbers could change significantly depending on your RMD size.

If you have more than one account with RMDs, such as both husband and wife who are roughly the same age and file a joint return, you could make four lump sum distributions to satisfy your first and second RMDs.

There’s another impact of RMDs that some don’t anticipate: you’re on Medicare Part B premiums, which may go up depending on the amount of your RMD.

Medicare Part B and Part D premiums are based on your Modified Adjusted Gross Income (MAGI) from two years prior. So, the increase may not be immediate, but if the Income-Related Monthly Adjustment Amount (IRMAA) kicks in, you’ll pay more.

This IRS chart shows that the IRMAA surcharge only occurs when a married couple’s MAGI exceeds $206,000.

Unless I make an abnormally high withdrawal in any given year, I would not exceed the limit.

This means that I will start taking RMDs in January 2025 as I withdraw once a month from my IRA. I don’t have to take out the exact RMD percentage divided by 12; I just have to make sure the total amount of my RMDs plus QCDs equals at least my total RMD requirement of my 12/31/2024 account balance before 12/31/2025 when my first RMD is due.

If I was still working, I might qualify for an exception from taking RMDs from my current employer-sponsored retirement account, such as a 401(k) or 403(b). If I meet all of the requirements, I can delay taking an RMD from the account until April 1 of the year after I retire.

What is the initial amount of my RMD?

This may also seem moot since, as I’ve already mentioned, I have been taking what amounts to an RMD since I retired a few years ago. (Some retirement planning professionals have suggested that implementing an RMD approach for income distribution earlier in retirement is a reasonably safe withdrawal strategy.)

On average, my annual withdrawal has been about 3.5%; some years less, others a little more, and on rare occasions, quite a bit more. That now includes QCDs, which are part of the 3.5% and will count toward my RMDs.

But 3.5% isn’t the exact amount of my first-year RMD under the new rules. To calculate that, I’ve got to go to the IRA Uniform Lifetime Table that applies to me: Married with a spouse isn’t more than 10 years younger than me (my wife and I are about the same age).

IRS Uniform Life Table Effective 1/1/2022

(It goes all the way to age 120+)

As you can see, at age 73, the Distribution Period is 26.5 Years. To compute my RMD percentage, I have to divide my account balance by 26.5, which gives me an annual number that I must withdraw. I have to divide that number by my account balance to calculate a percentage.

For example, if my account balance at the end of 2024 is $800,000 (not my actual balance), my annual withdrawal amount is $30,189, and $30,189 ÷ $800,000 is .0377 (3.77%). The percentage is the same regardless of your starting balance; the constant is the 26.5-year distribution period. However, the withdrawal percentage will increase each year.

As the table shows, the distribution period shrinks yearly, increasing my yearly RMD. Generally, you calculate RMDs using the prior year-end account balance with no adjustments.

But my year-end account balance could also shrink, perhaps because of large QCDs, higher spending, or a market downturn. If that happens, my RMD the following year may not be much higher but could be less under certain circumstances.

This 3.77% withdrawal rate is only about 25 basis points higher than I currently do, so it’s not a big deal. (It’s also less than the heralded and debated 4% safe withdrawal rate.)

I’ll have to remember that it will increase yearly, but I don’t consider that a big deal either, as I may have increased it due to inflation, increased spending, or charitable giving anyway.

Putting the whole plan together

Now that I know my withdrawal rate, I need to understand the tax implications, if any. As I write this in late December 2024, I also need an overall plan for RMDs, QCDs, and tax withholding for 2025, as I plan to make my first “real” RMD withdrawal in early January. I’ll discuss that in my next article.