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Last-minute tips for those facing Dec. 31 retirement plan RMDs

Reviewed and updated Thursday, Dec. 21, 2023

Older couple happy family Christmas gift exchange
Yes, you've got a lot to think about during the holidays, but add this tax task, too, if you're older and have a tax-deferred retirement plan. Don't miss the Dec. 31 RMD deadline.

We're just days away from Christmas, so here's my tax tip gift to all my readers of a certain age.

Take your required minimum distribution. Now. But definitely by the end of the year.

If you're a septuagenarian and saved so you wouldn't have to rely solely on Social Security, you probably already know that the Internal Revenue Service wants its cut of your tax-deferred retirement accounts. This is, in most cases, a traditional IRA, traditional 401(k), or similarly tax-code-section named workplace retirement plan.

Uncle Sam's insistence as you enter your 70s is understandable. He's tired of waiting to collect on that money that's been accruing, in many cases decades, without his intervention.

So he, as allowed by the Internal Revenue Code, demands you take some money out when you get older via an annual required minimum distribution, or RMD.

RMD ages increasing: How much older? The RMD trigger age has been in flux recently.

The law for ages set age 70½ — yes, a goofy half birthday; did you have a half candle on your cake? — as the age at which RMDs began. But a couple of expansive retirement law bills, the Setting Every Community Up for Retirement Enhancement, or SECURE, Act in 2019 and its follow-up SECURE 2.0 in 2022 upped the RMD ages.

SECURE 1.0 bumped the RMD starting age to 72 beginning in 2022. This year, thanks to SECURE 2.0, RMDs must start when you turn 73. By 2033, the RMD age will be 75.

But back to the here and now.

Whichever septuagenarian group you're in, you most likely* must withdraw a certain amount of your tax-deferred savings by year's end or face a severe penalty. That added cost is a steep 50 percent of the RMD amount you failed to withdraw. (*And more on those who aren't most likely in a minute.)

Your annual RMD is based on your tax-deferred account values at the end of the previous year, your age, and is calculated using life expectancy figures in special Internal Revenue Service tables.

If you or one of your older relatives you're spending time with over the holidays is facing an RMD in less than two weeks, here are some tips on taking out that mandated money.

Postponing your first RMD: Now for the promised * elaboration. If you turned 73 this year, you don't have to rush to meet the Dec. 31 due date. Or, practically speaking, make your RMD by Friday, Dec. 29, since that's the last business day of 2023.

You can postpone your first RMD until April 1 of the next year.

If you're still working into your seventies, you also can postpone RMDs from a workplace tax-deferred plan — 401(k), 403(b) and 457(b) plans; profit-sharing and other defined contribution plans; and defined benefit plans — until April 1 of the year after you retire.

Note, however, that this delay means you'll have to take two distributions in one tax year, the prior year's postponed amount and the one for next year due by that Dec. 31. This could bump up your overall income, affecting not only your federal (and state, if applicable) taxes, as well as your Social Security and Medicare costs.

As my grandmother would have said if she focused on taxes, it's six of one, half a dozen of the other when it comes to paying the tax collector.

Taking RMDs from multiple plans: If you have multiple IRAs, you must calculate the appropriate RMD for each one.

But you can take the total of all those separate IRA RMDs from just one individual retirement arrangement.

As for multiple tax-deferred workplace plans, the RMD rules depend on exactly which retirement vehicle you have.

A 403(b) plan, also known as a tax-sheltered annuity plan, is a retirement plan for certain employees of public schools, employees of certain Internal Revenue Code Section 501(c)(3) tax-exempt organizations, and certain ministers. The 403(b) RMD rules are the same as for multiple IRAs. You figure the amount for each, but can take the RMD total if you choose from just one 403(b).

However, 401(k) RMDs are different. If have several private sector workplace retirement accounts, known as defined contribution plans since you (and hopefully your employer) put money into them, each RMD is separate. You, or your former employer if you left the plans at your old workplaces, must calculate each plan's discrete RMD and distribute that amount.

Your prior employers should have an RMD system in place, but double check with the companies and/or the plan administrators, just in case. You know what they say about out of sight, out of mind, and you definitely don't want this potentially costly tax action to be overlooked.

Also, if you do have multiple types of tax-deferred accounts, do not comingle them when computing and making RMDs. Taking an RMD for one type of retirement account from a different type of account is a definite tax no-no.

What to do with your RMD: You do have to take your RMD, but you don't have to spend it.

Once you get your RMD money, it's yours to do with as you please. That includes —

  • Putting it into an emergency savings account, or something that pays a higher interest rate, such as a money market account or certificate of deposit.
  • Reinvesting it in taxable assets, such as individual stocks or mutual funds.
  • Helping with a grandchild's future college costs by contributing to the youngster's 529 college savings plan.
  • Passing along sound savings lessons by funding a Roth IRA for a young worker who earned income this year.

Or, if you're taking a lump sum RMD this month and you went a bit overboard with the Christmas gifts, you could use the money to pay off the credit cards you used for holiday (and prior) purchases.

One thing you cannot do with your RMD money is put it into another tax-deferred account. So don't even thing about depositing it back into the account from whence it was distributed or another RMD-affected plan.

Donating instead of receiving: You also can meet your RMD by donating the amount (up to $100,000 for 2023; it goes, thanks to the IRS annual cost-of-living adjustment, to $105,000 in 2024) to your favorite IRS-approved charity. Just make sure you do so by giving the gift as a Qualified Charitable Distribution, or QCD.

A QCD is accomplished by directly transferring money from a traditional IRA to the qualifying charity.

Even better, a QCD counts as your RMD, but since the distribution goes straight to the charity, the money won't be included in your taxable income. You can read more about this option in my post, The tax-saving ABCs of RMDs and QCDs.

Time your RMDs: December is one of the most hectic times of the year, so consider taking some of the crazy off your plate, at least when it comes to RMDs.

You don't have to wait until the last possible moment to take required distribution(s) from your tax-deferred account(s). As a New Year's finance and tax resolution, look into spreading your RMD throughout the year.

"Many IRA holders who spend their RMDs prefer to take monthly distributions," says Judith Ward, a CFP and a thought leadership director with T. Rowe Price.

The distribution method, one lump sum or a variety of payments, doesn't matter to the IRS as long as you meet the RMD dollar requirement.

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