The Internal Revenue Service (IRS) is reminding retirees aged 73 and older of their obligation to withdraw Required Minimum Distributions (RMDs) from their retirement accounts. Failure to comply could result in substantial tax penalties, the agency warned in a recent statement.
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What Are RMDs and Who Do They Affect?
Required Minimum Distributions are annual withdrawals mandated by the IRS for certain types of retirement accounts, including:
- Traditional IRAs
- SEP IRAs
- SIMPLE IRAs
- Employer-Sponsored Retirement Plans
These withdrawals are intended to ensure that retirement accounts are not used to indefinitely defer tax liabilities.
The Secure 2.0 Act, enacted in 2022, increased the RMD age from 72 to 73 for individuals born between 1951 and 1959. For those born in 1960 or later, the RMD age will rise to 75.
Roth IRAs: Owners of Roth IRAs are exempt from RMDs during their lifetime, but beneficiaries must follow the distribution rules after the account owner’s death.
Penalties for Missing RMDs
Failure to take the required distributions can result in a penalty of up to 25% of the undistributed amount. However, if the shortfall is corrected within two years, the penalty may be reduced to 10%.
How Are RMDs Calculated?
The RMD amount is calculated using the IRS’s Uniform Lifetime Table, which divides the prior year-end balance of a retirement account by the account holder’s life expectancy factor.
For example, a retiree with $500,000 in their IRA at the end of the previous year and a life expectancy factor of 25 would need to withdraw $20,000 as their RMD.
Key points to remember:
- Individualized Calculation: Each IRA must have its RMD calculated separately.
- Consolidated Withdrawals: While the total RMD must be met, retirees have the flexibility to withdraw the combined amount from one or more accounts of their choosing.
- Trustee Assistance: IRA trustees or plan administrators are required to inform account holders of their RMD amount or offer to calculate it.
Ultimately, it remains the account holder’s responsibility to ensure compliance with RMD requirements.
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Exemptions and Changes Under the SECURE 2.0 Act
The SECURE 2.0 Act introduced several changes to RMD rules:
- Roth Accounts in Employer Plans: The RMD requirement for designated Roth accounts in 401(k) and 403(b) plans has been eliminated.
- Delayed RMD Age: The starting age for RMDs is now 73, and for those born in 1960 or later, it increases to 75.
How Retirees Can Prepare
To assist retirees, the IRS provides worksheets and calculators to simplify RMD calculations. Additionally, financial advisors and retirement plan administrators can guide account holders in ensuring compliance.
Avoiding Penalties and Staying Informed
The IRS emphasizes the importance of timely and accurate RMD withdrawals to avoid unnecessary penalties. Retirees should:
- Review Year-End Account Balances: Ensure you know the value of your accounts as of December 31 of the previous year.
- Use IRS Resources: Access worksheets and online tools to calculate your RMD.
- Consult Professionals: Financial advisors and plan administrators can provide tailored guidance.
By taking proactive steps, retirees can meet their obligations and make the most of their retirement savings.
For more information, visit the IRS website or consult your financial advisor.
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