As 2025 unfolds, Americans turning 73 face a crucial tax deadline that could significantly impact their retirement savings. The Internal Revenue Service (IRS) requires individuals in this age group to take their first Required Minimum Distribution (RMD) from certain tax-deferred retirement accounts by April 1, 2025.
Failure to do so could result in a 25% penalty on the amount not withdrawn, which could create unnecessary financial strain during retirement.
What Are Required Minimum Distributions (RMDs)?
RMDs apply to traditional IRAs and employer-sponsored plans like 401(k)s, but they do not apply to Roth IRAs. Roth IRAs are exempt from RMDs during the account holder’s lifetime.
For those newly subject to RMDs in 2024, it’s essential to take timely action to avoid penalties and comply with IRS regulations. Although many financial institutions assist with calculations, the ultimate responsibility for taking the RMD lies with the retiree.
Why Is April 1, 2025, a Key Deadline?
The IRS calculates RMDs using the account balance as of December 31 of the previous year, divided by a life expectancy factor from official IRS tables. If the deadline is missed, retirees may face a 25% excise tax on the amount not withdrawn.
However, if the mistake is corrected within two years, the penalty can be reduced to 10% by submitting IRS Form 5329.
Beyond avoiding penalties, there are strategic tax considerations. Financial advisors often recommend taking the first RMD before December 31 of the year the retiree turns 73 to avoid taking two distributions in the same year.
This strategy can help minimize taxable income and reduce the risk of higher Medicare premiums or increased taxation on Social Security benefits. However, if retirees expect a high-income year, waiting until April may be more tax-efficient.
What Retirees Should Do Now to Avoid IRS Penalties
To stay compliant and protect their savings, retirees should:
- Confirm the correct RMD amount with their financial advisor or institution.
- Schedule the withdrawal well ahead of April 1 to prevent delays or errors.
- Plan the timing of their RMD to fit their broader tax situation.
- If the deadline is missed, act immediately and file IRS Form 5329 to potentially reduce the penalty.
By staying informed and acting promptly, retirees can avoid costly mistakes, maintain their financial security, and ensure a smoother path through retirement.