IRS warns seniors: Take your RMDs

The Internal Revenue Service is warning taxpayers born before 1951 that they may need to take required minimum distributions from IRAs and other retirement plans by Dec. 31.

RMDs are considered taxable income, and taxpayers may be subject to penalties if they don’t take them in time.

The agency noted that the age for when account-holders must begin taking RMDs was increased to 73 in 2023 by the SECURE 2.0 Act; it had previously been 72.

Meanwhile, individuals born in 1951 must receive their first RMD by April 1, 2025.

The IRS offers a RMD Comparison Chart explaining several of the rules apply to IRAs and defined contribution plans. Among the basic rules:

• For IRAs. Taxpayers have to take RMDs from IRAs, SIMPLE IRAs and SEP IRAs every year once they reach age 72 ( or 73 if the account owner reaches age 72 in 2023 or later), even if they’re still employed. Roth IRA owners don’t have to take RMDs, but after their death, their beneficiaries will be subject to the RMD rules.
• For retirement plans: RMD rules apply to employer-sponsored retirement plans, including profit-sharing plans, 401(k) plans, 403(b) plans and 457(b) plans. Participants can delay taking RMDs until they retire (unless they are a 5% owner of the business that sponsors the plan). Designated Roth accounts in a 401(k) or 403(b) plan are subject to the RMD rules for 2023, but starting in 2024, they will not be subject to the rules while the account owner is still alive.

Those who don’t make the necessary withdrawals may subject to an excise tax of 25% of the amount they were supposed to withdraw. That rate had been 50%; it was lowered by SECURE 2.0, which also lowered the tax rate to 10% if the error is corrected with two years.

Taxpayers who fail to take withdrawals and want to correct that need to file Form 5329, “Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts,” with the federal tax return for the year in the RMD was required but not taken.

 
Other complications

People who inherit an IRA, retirement plan account or Roth IRA may also be required to take RMDs, though the amounts and timing vary depending on a number of factors, including when the original owner died, whether they had begun taking RMDs before they died, and their exact relationship with the beneficiary. More information is available from the IRS in Retirement Topics – Beneficiary and Required Minimum Distributions for IRA Beneficiaries.

In response to the COVID pandemic, RMD requirements were waived for 2020; those who took coronavirus-related distributions had the option of returning it to a qualified account to avoid paying taxes. Qualified coronavirus-related distributions could be repaid over three years, or have the related taxes spread out over three years. RMDs from inherited IRA could not be repaid, but the taxes could be spread out over three years. More information is available in Coronavirus Relief for Retirement Plans and IRAs.

Finally, the IRS noted that those 70 ½ and older may be eligible every year to exclude from income a qualified charitable distribution of up to $100,000 paid directly to a qualified charity from their IRA or SEP or SIMPLE IRA – and those QCDs may count towards a taxpayer’s RMD for the year.

For more information, see the Retirement Plan and IRA Required Minimum Distributions FAQs.

These worksheets can help calculate RMDs and the appropriate payout periods.