For retirees aged 73 and 5 months, the Internal Revenue Service (IRS) has made it clear: the time has come to take your Required Minimum Distributions (RMDs). If you’re in this age group, this article will guide you through everything you need to know about the RMD rules and the importance of meeting the IRS deadline.
What Are Required Minimum Distributions (RMDs)?
RMDs are the minimum amounts that individuals must withdraw from their tax-deferred retirement accounts, such as 401(k)s, traditional IRAs, and other similar accounts, once they reach a certain age. The purpose of RMDs is to ensure that individuals start using the funds they’ve accumulated during their working years and pay taxes on those distributions.
Retirees typically begin taking RMDs when they turn 73, thanks to the passage of the SECURE Act 2.0, which increased the RMD age from 72. If you’re turning 73 or are already 73 years old and 5 months, you must ensure that you take your first RMD in a timely manner to avoid penalties and potential tax complications.
Key Dates and Deadlines for RMDs
The IRS deadline for taking your first RMD is April 1 of the year after you turn 73. For example, if you turned 73 in 2023, your first RMD must be taken by April 1, 2024. However, this isn’t the only deadline to be aware of.
After your first RMD, you’ll need to take RMDs annually by December 31 each year. So, if you take your first RMD in April 2024, your next RMD will be due by December 31, 2024. Missing any of these deadlines can result in severe penalties.
Penalties for Failing to Take an RMD
Failing to take an RMD by the deadline can result in a penalty of 50% of the amount that should have been withdrawn. This is a steep penalty, and it can significantly affect your retirement savings. For example, if your RMD for the year is $10,000 and you fail to withdraw it on time, the IRS can impose a penalty of $5,000.
To avoid such penalties, it’s essential that retirees take the necessary steps to withdraw the correct amount from their retirement accounts before the deadline.
How to Calculate Your RMD
The amount of your RMD is calculated based on the balance of your retirement accounts at the end of the previous year and your life expectancy. The IRS provides a life expectancy table to help you determine the correct amount to withdraw based on your age.
For example, if your IRA balance at the end of 2023 is $100,000, and you’re 73 years old, the IRS table may determine that you should withdraw approximately $3,000 (based on your life expectancy). If you have multiple retirement accounts, you must calculate the RMD separately for each account, though you can take the total RMD from one or a combination of accounts.
Steps to Take Your RMD
- Know Your RMD Amount: Determine how much you need to withdraw from each of your retirement accounts by checking your account balance as of December 31 of the previous year and using the IRS life expectancy tables.
- Contact Your Financial Institution: Once you’ve calculated your RMD, contact your retirement account custodian, such as the company that holds your 401(k) or IRA. They can help you process the distribution.
- Withdraw the Funds: You can take your RMD in a lump sum, as periodic payments, or in any other way that works for you, as long as you meet the required withdrawal amount by the deadline. Make sure the funds are available by April 1, 2024, to avoid penalties.
- Report Your RMD on Your Tax Return: Remember that RMDs are taxable income, so make sure to report the amount on your tax return for the year. The withdrawn funds will be taxed as ordinary income at your current tax rate.
Why Taking Your RMD on Time Is Important
The IRS requires retirees to start withdrawing from their retirement accounts because those funds are subject to taxation. While you may have enjoyed tax-deferred growth on your savings, the government eventually wants its share. Taking your RMD on time ensures you stay compliant with IRS regulations and avoid hefty penalties.
Additionally, taking your RMD can help manage your retirement income. By withdrawing funds on a regular basis, you can avoid large withdrawals at once, potentially pushing you into a higher tax bracket. Many retirees plan their withdrawals strategically to minimize their tax liability over time.
What if You Miss the RMD Deadline?
If you miss the RMD deadline, the IRS imposes a penalty of 50% of the amount you should have withdrawn. For example, if your RMD was $8,000, but you didn’t take it on time, the penalty would be $4,000.
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However, the IRS may be willing to waive the penalty if you can show that the failure to take the RMD was due to a reasonable error and that you are taking steps to correct it. This often involves filing Form 5329, which allows you to explain why the RMD was missed and demonstrate that you’ve taken corrective actions.
Final
If you’re a retiree who is 73 or older—and particularly if you’re 73 and 5 months—it’s critical that you take your Required Minimum Distribution on time. The IRS deadline of April 1, 2024, is fast approaching for those who turned 73 in 2023, and it’s important to take action to avoid costly penalties and complications. With proper planning, you can meet this requirement and continue to manage your retirement funds effectively.
Be proactive, consult your financial advisor if needed, and make sure you meet the IRS deadlines to enjoy a smooth retirement process without unexpected setbacks.