IRS to Pensioners: Don’t Skip Your RMDs or Risk a Hefty Tax Bite
Why the Fuss About
Required Minimum Distributions
(RMDs)?
Think of RMDs as the IRS’s way of saying, “You’ve deferred taxes long enough!” These withdrawals are mandatory for certain retirement accounts, ensuring Uncle Sam finally gets his cut of the taxes deferred when you originally contributed to your retirement nest egg.
RMDs apply to traditional IRAs, SEP IRAs, SIMPLE IRAs, and most employer-sponsored retirement plans. If you don’t take out at least the required amount each year, you’re considering a penalty tax of up to 25% on the amount you should’ve withdrawn. That penalty can drop to 10% if you fix the error within two years, but wouldn’t it be better to avoid the headache entirely?
Who Needs to Worry About RMDs?
Generally, anyone aged 73 and older who’s hung up their working hat needs to start making annual withdrawals. Here’s a quick breakdown of where RMD rules apply:
Traditional IRAs: Withdrawals are required annually once you hit 73, whether you’re retired or still dabbling in work.
Employer-Sponsored Plans: These include 401(k) and 403(b) accounts. You can usually delay withdrawals until you retire—unless, of course, you own more than 5% of the company sponsoring the plan.
Roth IRAs: Owners of Roth IRAs are off the hook during their lifetime. However, beneficiaries of Roth IRAs must adhere to RMD rules once the account owner passes away.
What’s New with RMD Rules?
The SECURE 2.0 Act, rolled out in 2022, brought some changes to the game:
• RMDs are no longer required for Designated Roth accounts in 401(k) and 403(b) plans.
• For folks born in 1960 or later, the starting age for RMDs bumps up to 75.
These updates are a win for some, but the core rules still apply to many account holders.
How Are RMDs Calculated?
RMD amounts aren’t a one-size-fits-all deal. They’re based on the value of your retirement accounts at the end of the previous year, divided by a life expectancy factor published by the IRS. The result? A customized amount you must withdraw annually.
If you feel like withdrawing more than the minimum, go ahead. Just make sure you meet the required baseline.
Who Helps With RMD Calculations?
Your IRA trustee or retirement plan administrator is required to give you a heads-up about your RMD amount or offer to calculate it for you. However, here’s the kicker: you’re the one ultimately responsible for ensuring the correct amount is withdrawn.
If you have multiple IRAs, you’re free to withdraw the total RMD amount from any one or more of your accounts, as long as you meet the overall required total. Just don’t skip a step—it’s your tax return on the line.
How Can the IRS Help?
Need a hand? The IRS provides handy worksheets to guide you through calculating your RMD and figuring out payout periods. But a word to the wise: start early. Waiting until the last minute could lead to costly mistakes.
Bottom Line on Required Minimum Distributions (RMDs)
If you’re 73 or older, it’s time to play by the IRS’s rules and take your RMDs in 2024 before its too late. Otherwise, you could face penalties that make your retirement savings look a little less rosy. Stay informed, stay proactive, and remember—when in doubt, consult your CPA Nerd. After all, avoiding a tax penalty is always worth the effort.
Leave a Reply