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As the end of the year approaches, the IRS is reminding individuals aged 73 and older to ensure they take their Required Minimum Distributions (RMDs) from retirement accounts like IRAs and employer-sponsored plans before the deadline. Failing to take the required withdrawal can result in significant penalties, so it’s important to stay informed about the rules and deadlines.
The SECURE 2.0 Act, which brought several key changes to retirement planning, is also a key consideration. Here’s everything you need to know about RMDs, including new provisions under the SECURE 2.0 Act, RMD penalties, and how to calculate the correct withdrawal amount.
What Are Required Minimum Distributions (RMDs)?
RMDs are the minimum amounts that individuals must withdraw from their retirement accounts once they reach a certain age. These distributions are taxable and, if not taken by the deadline, can incur hefty penalties. RMD rules apply to traditional IRAs, employer-sponsored retirement plans (like 401(k) and 403(b) plans), and some other retirement accounts.
The IRS has updated its guidelines with new provisions introduced by the SECURE 2.0 Act, which affects the age at which RMDs must begin and the treatment of certain accounts.
Key Changes Under the SECURE 2.0 Act
Raised RMD Starting Age: The SECURE 2.0 Act increased the age at which retirees must begin taking RMDs from 72 to 73, starting in 2023. This means that individuals who turn 73 in 2024 have until April 1, 2025, to take their first RMD.
No RMDs for Roth 401(k) Accounts: The SECURE 2.0 Act also eliminates RMDs for Designated Roth accounts in 401(k) and 403(b) plans while the account holder is still alive, effective for 2024 and beyond.
RMD Rules for Different Types of Retirement Accounts
IRAs:Once you reach age 73, you must take RMDs from your traditional IRAs, even if you're still employed. If you turn 73 in 2024, however, your first RMD can be delayed until April 1, 2025. The second RMD is due by December 31, 2025.
Employer-Sponsored Plans:RMDs are required from employer-sponsored plans like 401(k) and 403(b), but employees can delay withdrawals until retirement unless they own more than 5% of the company.
Roth IRAs:Roth IRA owners are not required to take RMDs during their lifetime. However, beneficiaries who inherit Roth IRAs must follow the RMD rules.
Designated Roth Accounts in 401(k) and 403(b) Plans:Beginning in 2024, these accounts are exempt from RMD rules for the original account holder, even if they are still alive.
Penalties for Missing RMD Deadlines
If you fail to take your full RMD by the deadline, the IRS may impose a 25% excise tax on the amount not withdrawn. If the mistake is corrected within two years, the tax rate is reduced to 10%.
How to Calculate Your RMD
The RMD amount depends on the balance in your account and your life expectancy. Account holders are responsible for calculating their RMDs, though IRA trustees or plan administrators can assist in determining the amount. Keep in mind that each account (e.g., different IRAs or retirement plans) requires a separate RMD calculation, though you can withdraw the total required amount from any one or more accounts.
For guidance, the IRS provides RMD worksheets to help you calculate the amounts and understand payout periods.
What to Do If You Miss an RMD
If you fail to take an RMD, you’ll need to file Form 5329 (Additional Taxes on Qualified Plans and Other Tax-Favored Accounts) with your federal tax return for the year the RMD was due but not taken. The IRS may assess penalties, but if you can show reasonable cause for the missed distribution, you may be able to request penalty relief.
Inherited IRAs and RMDs
Beneficiaries who inherit IRAs or retirement plans must also follow RMD rules. These rules depend on factors such as:
The year the original account holder passed away (post-2019 deaths are subject to new SECURE Act rules).
The beneficiary’s relationship to the original account holder (spouse, child, disabled individual, etc.).
Whether the account owner had already started taking RMDs before their death.
Inherited Roth IRAs are also subject to RMD rules for beneficiaries, though Roth IRA owners are not required to take RMDs during their lifetime.
As the year-end deadline approaches, it’s essential to review your retirement accounts and ensure that all required withdrawals are taken. If you’re turning 73 in 2024, remember you have until April 1, 2025, to take your first RMD, but subsequent distributions must still be made by December 31st of each year. Stay on top of these deadlines to avoid penalties and ensure your retirement savings are working for you.
For more information on RMDs and the SECURE 2.0 Act changes, visit the IRS's retirement plans page or consult with a tax professional.
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