Retirees who turned 72 in 2022 have just a few more days to make their first mandatory retirement plan withdrawal or required minimum distribution (RMD). The first required minimum distribution deadline for retirees is April 1, and if they miss it, they could face a big tax penalty (known as the excise tax) of as much as 25%.
Required Minimum Distribution Or RMD: What Is It?
The required minimum distribution (RMD) is the minimum amount of money that retirees are required to withdraw each year from their retirement accounts. The retirement accounts include traditional IRA, SEP IRA, SIMPLE IRA, and retirement plan accounts.
In 2023, the age at which retirees need to take their RMDs is changing to 73 years old. Before 2020, the age for RMDs was 70½. The 2019 Secure Act increased it to 72, and the 2022 Secure 2.0 Act raised the age further to 73, which starts in 2023.
Although the yearly required minimum distribution deadline is December 31, there is, however, an exception for the first year. This exception pushes the deadline to April 1.
So, if you reach age 72 in 2023, the deadline for your first RMD is April 1, 2025. This means the required minimum distribution deadline for your first RMD for the year 2024 is April 1, 2025.
If you reach age 73 in 2023, it means that you were 72 in 2022, and thus, you will be subject to the RMD rule that was in effect in 2022, i.e., the age 72 rule.
So, if you were 72 years of age in 2022, then the deadline for your first RMD is April 1, 2023 (RMD will depend on your account balance as of Dec. 31, 2021). The deadline for your second RMD will be Dec. 31, 2023 (RMD will depend on your account balance as of Dec. 31, 2022).
Generally, the account custodian or the retirement plan administrator informs you about the RMD for the account. You can calculate the amount yourself as well. To calculate the RMD, you need to divide the prior year's December 31 balance of the IRA or retirement plan account by the life expectancy factor. The IRS regularly publishes the life expectancy factor on its website.
How To Avoid A Penalty
The Secure 2.0 Act reduced the penalty for skipping the RMD or not withdrawing enough, from 50% to 25% starting in 2023. The applicable penalty rate could be reduced to 10% if retirees take the RMD during the “correction window.” This correction window is normally the end of the second tax year following the year of the missed RMD.
Retirees can also request a waiver if they miss the required minimum distribution deadline due to a reasonable cause. In this case, retirees need to include a letter of explanation with their tax return Form 1040, along with Form 5329.
The IRS notes that the penalty “may be waived if the account owner establishes that the shortfall in distributions was due to reasonable error and that reasonable steps are being taken to remedy the shortfall.”
If you are requesting a waiver, then you don’t need to pay the excess penalty up front, rather you need to follow the instructions in Form 5329. You will be notified if the IRS doesn’t accept your request. It must be noted that the penalty is levied on the amount retirees should have withdrawn.
Separately, account owners in a workplace retirement plan can also avoid the penalty. According to the IRS, account owners in a workplace retirement plan, such as a 401(k) or profit-sharing plan, are allowed to delay their RMDs until the year they retire. This exception, however, isn’t applicable if they are a 5% owner of the business sponsoring the plan.
Why Should You Not Miss The First Required Minimum Distribution Deadline?
In addition to a steep penalty, delaying the first RMD until April could also have other implications. If you miss the April required minimum distribution deadline, then your second RMD will be due by December 31. This could double your RMD income for the year.
If the RMD is a small amount, then it won’t have much impact on your tax situation. But if it is a big amount, then doubling the RMD income could push you into another tax bracket. This could result in tax issues, such as more Medicare premiums, difficulty adjusting medical expenses, etc.
So, it wouldn’t be wrong to say that missing the required minimum distribution deadline can be frustrating as well as costly. Thus, it is always recommended that you never miss the April minimum distribution deadline unless your income and tax situation allows it.
To make sure you don’t miss the deadline, you need to ensure that your distribution occurs by the applicable deadline. You can do this by arranging for systematic or automatic withdrawals on a predetermined date. Also, it is vital that you submit your withdrawal requests at least two months before the deadline. Once you get your RMD, don’t forget to check your bank statement to make sure you got the correct amount.