I just turned 73 so I need to start taking distributions from my IRA — but I don’t even need the cash. Will I have problems if I just leave it there to grow?

What are RMDs — and the possible IRS penalties?

When you put money into a 401(k) or a traditional IRA, you get to deduct your contributions from your income, so you're investing with untaxed money.

Once it's invested, your money will grow and you won't have to pay taxes on the gains either.

At some point, though, the government will want its cut. As per the IRS rule, you must annually withdraw a minimum amount from every tax-deferred retirement account you own.

To ensure you actually make withdrawals — and don't just let your money sit in your account forever — the government requires you to start taking some money out when you reach the age of 73 (if you hit that age after December 31, 2022 — otherwise, it's even earlier).

The “magic number,” as it were, that you must withdraw is based on the total value of the account at the end of the previous year and a figure referred to as a “life expectancy factor.”

So, RMDs for the current year are calculated based on the account balance as of December 31, 2023. If you don't take an RMD, or take a distribution that is below the required amount, the penalties can be steep.

The SECURE Act 2.0 Act excise tax rate is a hefty 25%; possibly 10% if you correct the issue within two years.

For example, let’s say your RMD should be $20,000 and you withdraw only $10,000 — you would be given a $2,500 penalty. You would still be liable for the tax on the full $20,000. For that reason alone, it's important to know your RMD each year and withdraw the required amount.

If you don’t take your entire minimum distribution for 2024, the excise tax will be applied on your April 2025 tax bill.

The IRS has provided worksheets to calculate the required amount and there are also tables to help.

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Some alternative ways to use your RMDs

For many seniors, using RMDs for everyday living expenses, paying down lingering debt, or splurging on a vacation can result in a happier, carefree retirement.

However, for those who don't immediately need, or want, the funds, it can be frustrating to sort out how best to use the funds in a way that aligns with your financial goals.

One option you have is to reinvest the money. You can reinvest the funds you withdraw into a certificate of deposit (CDs), treasury bonds, or into the stock market, depending on your risk tolerance.

Alternatively, if you want to avoid a sizable tax bill and you don't think you'll need the money now or in the immediate future, you could opt for a qualified charitable deduction (QCD). This would involve transferring the IRA assets directly to a charity of your choice.

This is treated as an above-the-line deduction, so you can claim it even if you take the standard deduction and you won't increase your taxable income — which could have consequences for both your tax bracket and the taxation of Social Security benefits.