Required minimum distributions have a crucial deadline approaching, according to the IRS.

• The IRS reminds retirees aged 73 and above that the annual deadline for required minimum distributions is fast approaching.
• You must begin taking Required Minimum Distributions (RMDs) at age 73, with the first payment due on April 1 of that year, and subsequent payments must be made by December 31.
• Failing to take the full amount or skipping an RMD by the deadline will result in a 25% penalty.

The IRS announced on Tuesday that if you are 73 or older and retired, you must adhere to a crucial annual deadline for mandatory retirement plan withdrawals, or face penalties.

You must begin taking required minimum distributions (RMDs) by age 73, with the first due date being April 1 after turning 73, and you must continue to take RMDs by Dec. 31 each year, as per the agency's guidelines.

Generally, the original account owner and designated beneficiaries must withdraw funds from tax-deferred accounts, such as 401(k) plans, individual retirement accounts, and other plans, annually. Additionally, some heirs must also take required minimum distributions (RMDs) for inherited Roth IRAs.

Before taking your first required minimum distribution, it's important to understand the implications. Here's a breakdown of the inflation for November 2024 in one chart. If you have unverifiable income, it can limit your mortgage options. However, there are ways to get around it.

Large balances can cause a 'tax nightmare'

RMDs can be a "tax nightmare in retirement" for some investors with bigger pretax accounts, according to certified financial planner Derek Williams with Veratis Advisors in Cary, North Carolina.

Rewritten: By taking pretax RMDs, you increase your adjusted gross income, which can result in higher Medicare premiums and other tax implications, according to him.

Your 2024 RMD is based on your pre-tax retirement balance as of December 31, 2023.

In 2024, your 2023 pretax balance will be divided by an IRS life expectancy factor to determine your required minimum distribution.

If you fail to withdraw the required minimum distribution (RMD) or do not take the full amount by the deadline, you will be subject to a 25% excise tax on the amount not withdrawn. However, if the RMD is corrected within two years, the penalty will be reduced to 10%.

If the shortfall was due to a "reasonable error," the agency may waive the RMD penalty if you take "reasonable steps" to correct it. However, you must submit Form 5329 along with a letter of explanation.

Reduce taxes with charitable transfer

Experts suggest that one can achieve both taking an RMD and planning a year-end gift to charity through a qualified charitable distribution, or QCD.

QCDs are transfers from an individual retirement account to a non-profit organization, which "reduces your RMD but does not increase your taxable income," as stated by CFP Michael Lofley of HBKS Wealth Advisors in Stuart, Florida.

Lofley, a certified public accountant, advised that it is possible to claim a tax break for charitable gifts even if deductions are not itemized on a tax return.

Since 2018, the standard deduction has been higher, but only about 10% of taxpayers claimed itemized tax breaks on their 2021 returns, according to the latest IRS data.