Saving and investing early, often, and continuously throughout your entire working career is absolutely critical to securing your financial future in retirement. Making contributions to your 401(k) or IRA provides tax benefits, allowing you to defer taxes owed on your contributions until you start making withdrawals in retirement. But, you can’t defer taxes forever.
The federal government requires that seniors start withdrawing funds from tax-deferred retirement accounts starting in their 70s, which are known as required minimum distributions (RMDs). If you neglect to take your RMDs on time, you could owe a penalty of up to a whopping 25% of the amount you were supposed to withdraw. Plus you’ll still owe taxes on your RMDs too.
To avoid getting yourself into a financial pickle during your golden years, there are three important RMD rule changes coming in 2025 that you’ll want to be aware of, as explained by The Motley Fool.
The Secure 2.0 Act will change the rules regarding inherited IRAs. If you inherit an IRA from someone who passed away after Dec. 31, 2019, you may be subject to RMDs on that account — in addition to your own — once these rule changes take effect.
Instead of being able to stretch out the withdrawals from an inherited IRA across your lifetime, you’ll only have 10 years to deplete the account, with few exceptions.
If you’re an older retiree who has inherited a retirement account from someone who was already taking RMDs, you’re currently required to continue taking RMDs under the current rules. This can create an increased tax burden.
However, the upcoming changes could offer some tax relief. If you find yourself in this situation, you may be able to take RMDs on the inherited account based on the original owner’s life expectancy, rather than your own. This means you might be able to take smaller RMDs and stretch them out over your lifetime, as you then wouldn’t be subject to the 10-year rule on the inherited IRA.
The Secure 2.0 Act increased the RMD age from 72 to 73 as of 2023 — and the age will increase to 77 starting in 2033.
So, even those born in 1959 (who will reach age 73 in 2032 and be required to take their first RMD by April 2033) will have to start taking their RMDs by age 73, even though they might turn 74 before the second age change takes effect in 2033.
To clarify this confusion, the IRS has provided specific guidelines for RMDs based on birth year:
https://www.gobankingrates.com/retirement/planning/changes-coming-to-retirement-required-minimum-distributions-in-2025/
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