Required minimum distributions for retirement are super-sized in 2024 — here's what seniors need to know (2024)

The stock market had a good run in 2023: The NASDAQ alone rose more than 43%, while the S&P 500 gained 24% and the Dow ratcheted up nearly 14%.

Higher returns on investments are nothing to fret over, but it could lead to unexpected financial consequences for seniors. That's because of required minimum distributions (RMD), which are mandatory withdrawals that must be made from retirement accounts starting at age 73.

In part thanks to market performance swelling retirement funds, distributions will be super-sized in 2024: The cumulative RMDs at Fidelity Investments, one of the largest financial services firms in the world, will hit a record $25 billion.

Below, find out how required minimum distributions work, what the tax implications are and what you can do with the funds you withdraw.

A required minimum distribution is the amount you must withdraw from your retirement accounts annually starting at age 73. These withdrawals were established when IRAs were established in the early 1970s, essentially to ensure the government gets to collect income tax on tax-deferred accounts.

In 2023, the Secure Act 2.0 bumped the age that RMDs must begin from 72 to 73. (It will increase again, to 75, in 2033.)

Generally, RMDs must be withdrawn by Dec. 31 in the year you turn 73. Your first distribution, however, can be delayed until April 1 of the following year. So, if you turn 73 on Oct. 1, 2024, you have until April 1, 2025, to take your first RMD.

But, if you wait, you'll have to take out two distributions in 2025.

RMDs must be taken from employer-sponsored retirement accounts — including 401(k), 403(b) and 457(b) plans — as well as from traditional IRAs and IRA-based plans, like SEPs, SARSEPs and SIMPLE IRAs.

Roth IRAs are exempt from RMDs while the owner is alive, although beneficiaries are subject to the RMD rules.

Starting in 2024, Roth 401(k) accounts are no longer subject to RMDs, either.

The money in a 401(k) or IRA has been growing tax-free. Once it's withdrawn, however, "it becomes taxable income and must be declared on your tax forms," says David John, senior policy advisor at the AARP Public Policy Institute.

If you delay your first distribution until the calendar year following your 73rd birthday, you'll have to take out two distributions to catch up. That could push you into a higher tax bracket.

Everyone's financial circ*mstances are different, but there are strategies that could reduce the tax implications. One option is a qualified charitable distribution: If you're at least 70½ years old, you can make a direct donation of up to $100,000 from a taxable IRA to one or more charities.

If you're still working, you can also defer the RMD on your employer-sponsored 401(k) or 403(b) until you retire. You'd still have to make withdrawals from any IRAs or other non-workplace accounts, as well as from older 401(k) that haven't rolled over.

Assaf suggests retirees hold off claiming Social Security for as long as possible and use their retirement accounts as their primary income, spreading out the tax liability and reducing future RMD amounts.

"It can also help you maximize your Social Security income," said Assaf. "Every year you delay claiming up to age 70, you get an 8% increase in your benefit."

Whatever your required distribution, always check what the tax withholding is.

"Come tax time you may owe a lot," says Kevin Martin, manager of the Tax Institute at H&R Block. "By default, it's usually 10% withholding. Depending on the size of your accounts, that may not be enough. So, it's important to leave enough over to pay your taxes."

"The bank will say, 'Look, on such and such a date, if we don't hear from you, we're going to transfer this percentage of your balance into your checking account,'" John said.

You can also calculate your required minimum distributions using the IRS' life expectancy chart.

There's not much you can do to avoid RMDs. But you can be smart about the funds once you have them.

"If you need that money to live on, the best option is to put it in an account where you can get it very quickly," said John. "And somewhere that it's not going to be seriously affected by market ups and downs."

High-yield savings accounts can generate generous returns while still providing easy access.

LendingClub offers a 5.00% APY, with no monthly fees and no minimum balance requirement after a $100 opening deposit. In addition, account holders are given a free ATM card and are allowed an unlimited number of withdrawals (up to a daily limit of $500).

The Western Alliance Bank High-Yield Savings Account has an eye-popping 5.24% APY, more than 11 times higher than the average traditional savings account. While there's no ATM access, there are also no monthly fees and the minimum account balance is just $1.

If you don't need the money in the short to medium term, the best way to handle it depends on your circ*mstances. You could invest it in the market or give it to family or a favorite charity.

"It's a decision that every individual needs to make once they've gotten their hands on the money," John said. "And if they have a financial advisor, it might be wise to talk to them."

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