Retirement Account Withdrawals: What Investors Need to Know
As the year draws to a close, a lot of investors are facing a pressing issue: making those mandatory withdrawals from their retirement accounts. If they don’t, they could be hit with IRS penalties, which could reach up to 25%. This applies not only to retirees but also to certain heirs inheriting individual retirement accounts.
For most retirees, it’s necessary to start withdrawing at age 73. This is known as the required minimum distribution (RMD). Your first RMD deadline is by April 1 in the year you turn 73, while subsequent withdrawals need to be done by December 31. Similarly, heirs also need to make sure their RMDs are completed by December 31 each year.
Interestingly, data from Fidelity indicates that many investors are still lagging behind. As of November 30, they found that 53% of people required to take RMDs in 2025 hadn’t made any withdrawals yet. Moreover, 29% of those pending RMDs stemmed from inherited IRAs, not including any RMDs from other company accounts.
Shyam Gangrani, who heads retirement distribution at Fidelity, mentioned to CNBC that to meet the December 31 deadline, it’s wise to take action sooner than later. “You should get it as soon as possible,” he advised. Failing to do this might limit your options, particularly if you need to sell off assets to cover your RMDs, which can complicate things.
It’s worth noting that every year, countless investors overlook the intricate rules around RMDs. The IRS has imposed penalties for missed distributions, and these rules have evolved over recent years with new legislation and guidance.
Missed RMD Penalties: Key Information
Not taking your full RMD by the deadline means facing a hefty penalty of 25% on the amount owed. However, if an RMD is “timely amended” and filed within two years, this penalty can be lowered to 10%. According to the IRS, if a shortfall results from a “reasonable error” and you’ve acted to correct it, you might even be able to avoid the penalty altogether.
Ganrani emphasized that if you’ve missed that December 31 deadline, it’s crucial to get your funds as quickly as possible. This shows a “timely” withdrawal, which could help when dealing with the IRS. He remarked that the agency tends to be accommodating when it appears that you’re making an effort to comply.
Inherited IRA Rules: Navigating the Challenges
Experts highlight that the complex rules governing inherited IRAs can also lead to penalties from the IRS. “This is the biggest landmine of 2025,” Scott Van den Berg, a certified financial planner and president of Century Management, remarked.
Starting in 2020, certain inherited accounts are subject to a “10-year rule,” mandating that heirs must deplete the account balance within ten years following the original owner’s death. Additionally, some non-spouse beneficiaries, like adult children, will need to begin withdrawing RMDs over a ten-year period starting in 2025.
If the original account owner had already started taking RMDs before passing away, the non-spouse heirs are required to continue those distributions each year. The IRS had previously been lenient with penalties for missed RMDs, but this won’t be the case in 2025.
“Many beneficiaries are unaware that the rules have changed,” Van den Berg cautioned, emphasizing the need for awareness and action as the deadline approaches.
