If you have an IRA or other tax-deferred retirement account like a 401(k), you must start taking required minimum distributions (RMDs) once you reach a certain age. The SECURE 2.0 Act raises the age at which RMDs must first be taken. For those born between 1951 and 1959, the RMD age will be 73. For those born in 1960 or later, the RMD will be 75.
The purpose of RMDs is to ensure that you use at least some of the funds in your retirement accounts while you are still alive. The amount you are required to withdraw will depend on your age and how much you have in your account as of December 31 each year. RMDs are required for all of the following retirement savings accounts:
Your first RMD must be taken by April first of the year following the year in which you reach the age of RMD. If you turn 73 this year and were born in the 1950s, you will have to start taking required minimum distributions next April. After that, you must take at least one annual RMD each year on or before December 31.
RMDs are taxable income and taking two RMDs in a single year could increase your tax bracket, as well as Medicare premiums. You may be better off taking distributions before you reach the RMD age or during that year, rather than taking multiple distributions in a subsequent year.
In the past, the IRS imposed an “excess accumulation” penalty tax of 50% if you failed to take your full RMD out by the deadlines. However, the SECURE 2.0 Act has reduced this penalty to 25% starting in 2023. You can also reduce it to 10% if you make the correction within a given timeframe. This “correction window” begins on January 1 of the year following the RMD shortfall and ends on the earlier of:
You can request a penalty waiver by filing IRS Form 5329 if you have met the standards for remedying the shortfall (including making any “catch-up” distributions before you file this form).
To learn more about RMDs and how to manage them as part of your retirement plan and estate plan, contact Illumination Wealth today.