The Internal Revenue Service (IRS) has issued a reminder to retirees aged 73 and above to take the Required Minimum Distributions (RMDs) from their Individual Retirement Arrangements (IRAs) and other retirement plans before the end of the year. These mandatory withdrawals are considered taxable income and failing to take them can result in significant penalties.
The SECURE 2.0 Act, recently introduced, has brought changes to the RMD requirements. It has increased the age at which retirement account owners must start taking RMDs and has also eliminated the RMDs for Designated Roth accounts within 401(k) and 403(b) plans. This means that starting in 2024, owners of Designated Roth accounts in these plans will not be subject to RMDs while they are alive.
The rules for minimum distributions generally affect original account holders and their beneficiaries across various plans. Traditional IRAs and IRA-based plans require annual withdrawals starting at age 73, regardless of employment status. Employer-sponsored retirement plans also follow RMD rules, with certain exceptions allowed for individuals who own less than 5% of the sponsoring business and are still working. Roth IRA owners, unlike traditional IRA owners, are not obligated to take RMDs during their lifetime, but beneficiaries must adhere to these rules after the owner's death.
Account owners who do not withdraw the full RMD amount by the deadline face a 25% excise tax on the shortfall. This tax rate can be reduced to 10% if the mistake is rectified within two years.
The process of calculating RMDs involves either the IRA trustee or plan administrator informing the account owner of the amount or offering to calculate it. While each plan's RMD must be calculated individually, owners can choose to take the total required amount from one or multiple accounts, as long as the sum meets the annual RMD requirement. Account owners must ensure the accuracy of the RMD taken, and the IRS provides worksheets to assist with these calculations.
If an RMD is not taken, the account owner should file Form 5329 with their federal tax return for that year. Beneficiaries of inherited IRAs and retirement plans may also need to take RMDs, and the IRS offers guidance for these situations. Factors such as the beneficiary's relationship to the account owner and the timing of the account owner's death, particularly in relation to the SECURE Act provisions, can affect the distribution requirements.
The IRS encourages taxpayers to utilize tools and resources available on the IRS.gov website, including forms, instructions, and publications, to help manage their RMDs and understand the tax implications.
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