(DailyChive.com) – The IRS has issued a crucial reminder for retirees about Required Minimum Distributions (RMDs), which, if ignored, could lead to substantial penalties.
At a Glance
- Retirement accounts like IRAs and 401(k)s require withdrawals starting at age 73.
- Roth IRAs are exempt from RMDs during the account owner’s lifetime.
- Failing to adhere to RMDs can lead to a 25% excise tax penalty.
- RMD deadlines are April 1 of the year after age 73 and December 31 yearly thereafter.
Understanding IRS Requirements
The IRS mandates that retirees begin withdrawing from their retirement accounts, such as IRAs and 401(k)s, upon reaching the age of 73. This requirement aims to ensure these tax-deferred funds eventually enter the taxable income bracket. Non-compliance attracts a 25% excise tax penalty, although waivers might be available for genuine mistakes if corrective steps are demonstrated.
Roth IRAs and Designated Roth accounts in 401(k)s or 403(b) plans are not bound by RMDs during the owner’s lifetime. This means the funds can continue to grow tax-free until withdrawal.
My year end planning guide for 2024:
RETIREMENT PLANNING
↳ The maximum 401(k) employee deferral for 2024 is $23,000 ($30,500 over age 50).
↳ The maximum 401(k) contribution including after-tax contributions is $69,000 ($76,500 over age 50) including employer match, if your…
— Mark Cecchini, CFP® (@markcecchini) December 10, 2024
Key Deadlines and Calculations
Individuals turning 73 in 2024 must initiate RMDs by April 1, 2025. Postponing to this deadline results in two distributions that year, potentially leading to a higher taxable income. Retirees should ideally plan to spread out distributions to manage tax liabilities efficiently.
RMD amounts are calculated using the account balance from the preceding year divided by the IRS’s Uniform Lifetime Table distribution period. Different tables exist for particular circumstances, such as a notably younger spouse as the sole beneficiary.
Consequences of Non-compliance
Failure to comply with RMDs triggers significant penalties. A default incurs a 25% excise tax, reduced to 10% if corrected within two years. The IRS may waive this penalty for reasonable mistakes, provided Form 5329 is filed, explaining the shortfall as an error and outlining the corrective measures.
Experts, such as Charles Schwab, suggest avoiding double RMDs in one year due to potential tax increases. Planning withdrawals according to personal needs and tax strategy is recommended.
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