Are you aware?

As you are likely aware, if you have an IRA or other tax-deferred retirement account, 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, from ages 72 to 75, over the next 10-years.

The RMD Age

The RMD age will be 73 for those born between 1951 and 1959 and 75 for those born in 1960 or later. RMDs purpose is to ensure that you use the funds in your retirement accounts while you are still alive, rather than using them as an estate planning device to pass money to your heirs tax-free.

Withdrawal amount

The amount you are required to withdraw as an RMD depends on your age, and the balance of your retirement account as of December 31 of the previous year. RMDs are required for traditional IRAs; SEP-IRAs; SIMPLE IRAs; solo 401(k) plans; and all employer-sponsored tax-deferred retirement plans, including 401(k) plans, 403(b) plans, profit-sharing plans, and 457(b) plans.

Your first RMD must be taken by April 1 of the year following the year you reach the age of RMD. For example, if you turn 73 in 2024, you have until April 1, 2025, to take your first taxable RMD. Including 2025 and every year after, you must take an annual RMD on or before December 31.

Taxes and the IRS

It’s important to note that taking two RMDs in one year could increase your tax bracket and even your Medicare premiums. If you are faced with this situation, it’s best to take the first RMD in the year you reach the age of RMD. 

In the past, the IRS imposed an “excess accumulation” penalty tax of 50 percent if you failed to take your full RMD by the deadline. But starting in 2023, the SECURE 2.0 Act reduces the penalty to 25 percent. If you correct the shortfall within the correction window, you can reduce the penalty to 10%. The correction window begins on January 1 of the year following the RMD shortfall and ends on the earlier of:

• when the IRS mails a Notice of Deficiency,

• when the penalty is assessed, or

• the last day of the second tax year after the penalty is imposed.

If the shortfall was due to reasonable error, but you remedy the error, you may request a penalty waiver. File the IRS Form 5329 and write a letter explaining the reasonable error. Before you file the waiver request, you should make a catch-up distribution from your retirement accounts to make-up for the RMD shortfall.

If you have any questions or concerns, please do not hesitate to reachout. We're here to help and support you in your retirement planning.