As the year wraps up, most people are busy with holiday shopping, charitable donations, and planning time with family. But if you’re an older taxpayer with one or more tax-advantaged retirement accounts—or a younger beneficiary who has inherited one—there’s another critical item to handle before December 31: taking your required minimum distributions (RMDs).
Why Taking RMDs on Time Matters
Failing to take an RMD when required can be costly. In most situations, RMDs must be withdrawn by December 31 each year. If you miss the deadline, you may face a penalty equal to 25% of the amount you should have withdrawn.
If the mistake is corrected promptly, the penalty can drop to 10%, but even that reduced penalty is significant. Staying compliant helps you avoid unnecessary tax surprises.
Who Is Required to Take RMDs?
Once you reach age 73, you are generally required to take annual RMDs from:
Traditional IRAs
These include all non-Roth individual retirement accounts.
Employer-Sponsored Defined Contribution Plans
Such as:
- 401(k) plans
- 403(b) plans
- Profit-sharing plans
Exception: If you’re still employed and you’re not a 5% or greater owner of the employer sponsoring the plan, you may be allowed to delay RMDs from that specific employer plan.
In your first RMD year, you may defer taking the withdrawal until April 1 of the following year—but doing so means you’ll take two RMDs in that next year, which could increase your tax bill.
RMDs for Inherited Retirement Accounts
If you inherited a retirement plan, the rules are more complicated. Whether you must take an RMD—and how much—depends on factors such as:
- Whether the original account holder had begun taking RMDs
- The year you inherited the account
- Your relationship to the deceased
When the rules apply, they typically affect both traditional and Roth inherited accounts.
If you’re unsure whether an RMD applies to your inherited plan this year, professional guidance is strongly recommended.
Should You Take More Than the Required Minimum?
Generally, withdrawing only the minimum is beneficial because it allows your money to keep growing tax-deferred. However, taking a larger distribution can be strategic in a year when your tax bracket is lower than usual.
Before taking more than required, consider the potential downsides:
- Reduced future tax-deferred growth
- Possible taxation of your Social Security benefits
- Higher Medicare premiums and prescription drug costs
- Loss of income-based tax deductions or credits, including the newer $6,000 senior deduction
Additionally, while retirement plan withdrawals are not subject to the 0.9% Medicare tax or the 3.8% Net Investment Income Tax (NIIT), they do increase your modified adjusted gross income (MAGI). As a result, a larger distribution could trigger or increase NIIT liability.
Will You Need to Take RMDs in 2025?
RMD rules can be confusing—especially when inherited accounts are involved. If you are required to take RMDs, calculating the correct amounts for 2025 is essential to avoid penalties.
Our team can help ensure you meet all IRS requirements and take the proper withdrawals. Contact us to review your situation and stay fully compliant.
© 2025