As we approach the end of the year, it’s essential to ensure that we’re on track with our financial obligations, including Required Minimum Distributions (RMDs) for tax-deferred retirement accounts. This article serves as a reminder to double-check your qualified distributions to make sure your RMD has been satisfied for 2023.
What is an RMD?
To provide context, an RMD is the IRS’s mandated minimum withdrawal amount that individuals must take from their tax-deferred retirement accounts each year after reaching a certain age. The minimum amount is calculated based on the account balance at the end of the previous year and the individual’s life expectancy.
As of the time of writing, the age requirement is 73 years, which means that individuals who turn 73 must make a withdrawal of at least their RMD amount from their account(s) each year. The RMD rules apply specifically to tax-deferred retirement accounts, which include Traditional IRAs, Rollover IRAs, SIMPLE IRAs, SEP IRAs, most small-business retirement accounts, and most 401(k) and 403(b) plans.
While RMDs may seem like a straightforward concept, there are some plot twists to keep in mind. Starting in 2023, the RMD beginning age requirement has increased to 73. For example, if an individual turned 72 in 2023, they wouldn’t have to take their first RMD until April 1, 2025. This is because, in the first eligible year, individuals have the option to delay their first RMD until April 1 of the following year.
It’s important to remember that all future RMDs must be taken by December 31 each year. If an individual chooses to delay their first RMD, it means that they’ll need to take two RMDs in the same calendar year, which could significantly impact their taxes. Therefore, it’s a good idea to consult with a tax or financial advisor to understand the potential tax implications of delaying the first RMD.
What happens if I don’t take my RMD?
Individuals who fail to withdraw at least their RMD amount each year might face a penalty from the IRS. The penalty is typically equal to 50% of the difference between the calculated amount and the amount withdrawn. The penalty can be waived under certain circumstances, such as a reasonable cause for the missed RMDs.
Which withdrawals count towards my RMD?
It’s important to note that only withdrawals made from tax-deferred retirement accounts count towards satisfying the annual RMD requirement. Withdrawals made from other accounts, such as a regular brokerage account or savings account, do not count towards the RMD. Roth IRAs are typically excluded from RMD requirements since they are funded with after-tax money. However, if an individual inherits a Roth IRA from someone other than their spouse, they may be required to take RMDs.
In conclusion, RMDs are a crucial aspect of managing tax-deferred retirement accounts. Missing an RMD deadline or failing to withdraw the correct amount could result in hefty penalties from the IRS. As the year comes to a close, individuals must ensure they have withdrawn the necessary RMD amount from their accounts and consult with a tax or financial advisor to avoid any potential tax implications.
