As 2024 draws to a close, the Internal Revenue Service (IRS) is reminding retirees aged 73 and older to take their required minimum distributions (RMDs) from retirement accounts before the year-end deadline.
Missing these deadlines can result in significant penalties. Here’s what you need to know to stay compliant and avoid unnecessary costs.
Contents
Understanding Required Minimum Distributions
Required Minimum Distributions (RMDs) are the minimum amounts that retirees must withdraw annually from their retirement accounts, such as Individual Retirement Arrangements (IRAs) and 401(k) plans, once they reach a certain age.
These withdrawals are considered taxable income and are mandated to ensure that individuals do not defer taxes indefinitely on their retirement savings.
Key Deadlines for RMDs
- First RMD Deadline: If you turned 73 in 2024, you are required to take your first RMD by April 1, 2025. However, delaying this withdrawal means you’ll need to take two RMDs in the same year—one by April 1 and another by December 31, 2025—which could increase your taxable income for that year.
- Annual RMD Deadline: For those who have already begun taking RMDs, the annual deadline to withdraw your RMD is December 31 of each year. Failing to withdraw the full amount by this date can result in hefty penalties.
Penalties for Missing RMD Deadlines
The IRS imposes a 25% excise tax on any RMD amount that is not withdrawn by the deadline. This penalty can be reduced to 10% if the missed RMD is corrected within two years. To avoid these penalties, it’s crucial to understand your RMD obligations and ensure timely withdrawals.
Key RMD Information
| Age | Account Type | First RMD Deadline | Annual RMD Deadline | Penalty for Missing Deadline |
|---|---|---|---|---|
| 73 | Traditional IRA, 401(k) | April 1 of the following year | December 31 each year | 25% excise tax (reduced to 10% if corrected within 2 years) |
| Any | Roth IRA (Inherited) | December 31 each year | December 31 each year | 25% excise tax (reduced to 10% if corrected within 2 years) |
| Any | Designated Roth Accounts in 401(k) or 403(b) | Not applicable starting 2024 | Not applicable starting 2024 | Not applicable |
Changes Introduced by the SECURE 2.0 Act
The SECURE 2.0 Act has introduced significant changes affecting RMDs:
- Increased RMD Age: The age at which retirees must begin taking RMDs has been raised from 72 to 73, providing more time for tax-deferred growth.
- Elimination of RMDs for Roth Accounts: Starting in 2024, designated Roth accounts in 401(k) and 403(b) plans are no longer subject to RMDs during the account owner’s lifetime, aligning them with Roth IRAs.
Steps to Ensure Compliance
- Calculate Your RMD: Determine the correct amount to withdraw by dividing your account balance as of December 31 of the previous year by the distribution period from the IRS’s Uniform Lifetime Table.
- Consult Your Plan Administrator: While plan administrators may calculate RMDs, it’s ultimately your responsibility to ensure accuracy.
- Plan Withdrawals Strategically: Consider the tax implications of your withdrawals, especially if taking multiple RMDs in one year.
Conclusion
As the year-end approaches, it’s imperative for retirees aged 73 and older to review their RMD obligations and ensure timely withdrawals to avoid substantial penalties. Stay informed about recent legislative changes, such as those introduced by the SECURE 2.0 Act, and consult with financial advisors to make informed decisions regarding your retirement distributions.
FAQs
What happens if I miss the RMD deadline?
Missing the RMD deadline results in a 25% excise tax on the amount not withdrawn. This penalty can be reduced to 10% if corrected within two years.
Are Roth IRAs subject to RMDs?
Roth IRA owners are not required to take RMDs during their lifetime. However, beneficiaries of Roth IRAs must adhere to RMD rules after the account owner’s death.
How has the SECURE 2.0 Act changed RMD rules?
The SECURE 2.0 Act increased the RMD starting age from 72 to 73 and eliminated RMDs for designated Roth accounts in 401(k) and 403(b) plans starting in 2024.
