Required minimum distributions (RMDs) have swelled to new heights in 2024 — here are 4 facts all retirees need to know about mandatory withdrawals from retirement accounts

You’ve probably been diligently saving for retirement for decades and, hopefully, your retirement accounts are full of cash. If so, pat yourself on the back because you’ve done well.

If you’re about to enter retirement, or you’re already enjoying your golden years, it might soon be time to start taking required minimum distributions (RMDs) from your retirement accounts.

Here’s what you need to know.

What you need to know about RMDs

An RMD is the amount you must withdraw from your retirement accounts annually starting at age 73. As of last year, the passage of the Secure 2.0 Act effectively raised the required minimum distribution age from 72 to 73.

Despite the increase in RMD age, RMDs are “supersized” this year. Why? Record stock market gains last year combined with the number of retirees required to start taking RMDs this year have increased RMDs significantly.

Fidelity Investments, one of the largest financial services firms in the world, estimates that its cumulative RMDs will hit a record $25 billion this year (wow!)

“Due to the market high on Dec. 31, 2023, as well as having more clients who are now eligible, we anticipate RMDs in 2024 to be the largest ever,” Rita Assaf, Fidelity’s vice-president of retirement products, explained to CNBC Select.

So, if you’re turning 73 this year (or you just want to understand more before you reach this age), there are a few things you’ll need to know when it comes to your RMDs.

Four key RMD facts

Here are four key facts all retirees need to understand when it comes to taking RMDs, as per Fidelity Investments and CNBC.

• 1. RMDs are taxed as ordinary income. RMDs count as ordinary income no matter what. This means that your AGI (adjusted gross income) will go up. In turn, you could be pushed into a higher tax bracket, you might have to pay higher Medicare premiums, your Social Security benefits could be taxed (depending on where you live) and may lose out on other tax breaks.
• 2. You’ll be penalized financially for not taking RMDs. If you miss the deadline to start taking RMDs, or if you take less than your required amount, you’ll owe a whopping 25% penalty on the sum you were supposed to withdraw but ultimately didn’t (yikes!). However, the IRS may offer you grace and reduce the penalty to just 10% if you correct the mistake within two years.
• 3. RMDs are unavoidable. Once you turn 73, you’re required to take RMDs by Dec. 31 each year. While there’s no way around this, you can take the money and put it to work. For example, putting cash from your RMDs in a high-yield savings account to earn interest or reinvesting the money in other assets are two ways to grow your wealth even more.
• 4. Roth IRAs don’t have RMDs (with one small exception). Since you already paid taxes upfront on Roth IRA contributions, you won’t be required to take RMDs. Also, your investment gains are 100% tax-free as long as you’re at least 59 and a half and you’ve owned the account for five years. The only time you’ll have to take RMDs from a Roth IRA is if you inherited the account from someone else.

What if you’re still working?

If you’re still working at age 73 and you participate in an employer-sponsored retirement plan, you won’t have to take RMDs. (However, you’ll still be required to take RMDs from other retirement plans you may have from former employers.)

One caveat: you’ll need to take distributions once you reach RMD age if your current employer’s plan specifically requires it or if you own more than 5% of the business where you work.