Hey guys, it’s Bette Hochberger, CPA, CGMA here, and I wanted to hop on to discuss an upcoming deadline. As we approach the end of the year, the IRS has issued an important reminder for retirees aged 73 and older: it’s time to take your required minimum distributions (RMDs) from your retirement accounts. This is an important step to ensure compliance with tax regulations and avoid hefty penalties.
What Are RMDs?
Required Minimum Distributions are the minimum amounts that account holders must withdraw from their retirement accounts each year. For most individuals, this requirement kicks in when they reach age 73. The IRS emphasizes that these withdrawals are considered taxable income, and failing to take the full amount by the deadline can result in significant penalties.
Key Changes Under the SECURE 2.0 Act
The SECURE 2.0 Act has introduced some notable changes regarding RMDs. One of the most significant updates is the increase in the age at which retirees must start taking RMDs, now set at 73 instead of 72. This means that individuals born in 1951 must take their first RMD by April 1, 2025, based on their account balance as of December 31, 2023, and the second RMD is due by December 31, 2025, based on their account balance on December 31, 2024. Additionally, the Act has eliminated RMDs for Designated Roth accounts in 401(k) and 403(b) plans while the account owner is alive, providing more flexibility for those with these types of accounts.
Who Needs to Take RMDs?
RMD rules apply to various types of retirement accounts, including:
– Traditional IRAs: Account holders must begin withdrawals at age 73, even if they are still working.
– Employer-Sponsored Plans: Participants in these plans must also adhere to RMD rules, although those who own more than 5% of the business may have different requirements.
– Roth IRAs: While Roth IRA owners are not required to take distributions during their lifetime, beneficiaries must follow RMD rules after the account owner’s death.
Penalties for Missing RMDs
It’s important to understand the consequences of not taking your RMD on time. If you fail to withdraw the required amount, you could face a 25% excise tax on the amount not withdrawn. However, if you correct the mistake within two years, this penalty can be reduced to 10%.
Calculating Your Required Minimum Distribution
Calculating your RMD can be complex, as each retirement account must be calculated separately. However, you can withdraw the total required amount from one or more accounts as long as the annual requirement is met. The IRS provides worksheets to assist in these calculations, but ultimately, the responsibility lies with the account owner to ensure the correct amount is withdrawn.
Inherited IRAs and RMDs
Beneficiaries of inherited IRAs also need to be aware of RMD requirements. The rules can vary significantly based on when the original account owner passed away and the beneficiary’s relationship to them. For example, new rules introduced by the SECURE Act affect how RMDs are calculated for beneficiaries of accounts inherited after 2019.
So, as the year draws to a close, it’s essential for retirees to stay informed about their RMD obligations. By understanding these requirements and the implications of the SECURE 2.0 Act, retirees can better manage their retirement funds and avoid unnecessary penalties. If you have questions about your specific situation, feel free to reach out to us to ensure compliance and optimize your retirement strategy!
As always, stay safe, and I’ll see you next time.
