Required Minimum Distribution Rules (RMDs) and Penalties

The amount of distribution can vary year to year and is based on:

• The value of all the taxpayer’s traditional IRAs or the value of the pension needing distribution
• The age of the taxpayer
• If there is a beneficiary, the age of the beneficiary

Taxpayers who don’t make the RMD, must pay a 25% excise tax with their tax return for each year the payment isn’t made.

What are Required Minimum Distributions?

So, you have a retirement plan and are about to turn 73 years old. That’s when the annual Required Minimum Distributions kick in for nearly all your retirement plans. It’s critical that you take out at least the minimum that the IRS requires every year, or you could face penalties. It’s a good idea to only take out what you need and have taxes withheld from your distribution.

When do I have to start taking RMDs?

According to the IRS, for IRAs, including SEP and Simple IRAs, “if you reach age 73 in 2023 or later you must take your first RMD by April 1 of the year after you reach 73.”

• IRAs (including SEP IRAs and SIMPLE IRAs)

  • April 1 of the year following the calendar year in which you reach age 70½ before January 1, 2019

  • April 1 of the year following the calendar year in which you reach age 72, before January 1, 2023.

  • April 1 of the year following the calendar year in which you reach age 73, after December 31, 2022

• 401(k), profit-sharing, 403(b), or other defined contribution plan

  Generally, April 1 following the later of the calendar year in which you:

  • Reach age 72 before December 31, 2022, or

  • Reach age 73 after December 31, 2022, or

  • Retire (if your plan allows this).

Every single year after your required beginning date, your RMD must be paid by December 31.

What if I’m still working at age 73?

Some people continue working after the age of 73 and there is a “still working” exception for RMDs associated with 401(k), profit-sharing, 403(b) or other company defined contribution plans. In that case, as long as you are still working on December 31^st of any year, you can push the RMD for that company’s plan off until you retire or leave the company.
If you have traditional IRAs, it doesn’t matter if you are still working you must start taking your RMDs.

Do all retirement plans require minimum distributions?

As we mentioned, most retirement plans require RMDs. There is one notable exception: the Roth IRA and Roth 401(k) plans, meaning that you don't need to take RMDs while you are alive, but if you leave the Roth IRA to a family member or friend, that beneficiary must take RMDs. That means you can leave your Roth IRA alone and not take any distributions during your lifetime so you can make your heirs the beneficiaries without paying any taxes on the fund. However, your beneficiaries of the Roth IRA will be required to follow the standard RMD rules once they inherit the Roth IRA.

How much are the required minimum distributions?

RMDs are different for every person depending on your age and the amount of money you have in all of your traditional IRAs or each tax-deferred retirement account on December 31^st of the year you are required to start withdrawing RMDs from your account.

How do I calculate my RMD? 

To calculate how much your RMD will be, you will need to add the total balance of all your traditional IRAs together. If have more than one retirement account, each account RMD is determined separately and generally a retirement account plan administrator will determine your RMD for you. Next, divide your account(s) balance on December 31^st by your life expectancy factor. You can use the following life expectancy table from the IRS to determine your life expectancy factor based on your age if you are the retirement account owner AND unmarried, married and your spouse is no more than 10 years younger than you, or married and your spouse is not the sole beneficiary of your retirement account.

IRS Uniform Lifetime Table

The IRS provides a worksheet you can use to calculate your Required Minimum Distribution unless your spouse is the sole beneficiary of your IRA and he or she is more than 10 years younger than you.

If your spouse is the sole beneficiary of your IRA and he or she is more than 10 years younger than you, you can use this IRS worksheet to calculate the Required Minimum Distribution for this calendar year.

Also, the AARP website has a great calculator you can use here. 

Are RMDs taxed?

Yes, RMDs are taxed as ordinary income in the year you take them if your contributions to the accounts were tax deductible. If you also made nondeductible contributions to your retirement accounts, meaning that you paid taxes on those contributions when you made them, some of the amount won't be subject to income taxes. You can learn more about how to calculate and report by visiting the IRS About Form 8606, Nondeductible IRAs page. 

What is the deadline for RMD withdrawals?

The Required Minimum Distributions deadline is December 31 each year. However, if it is your first year taking an RMD withdrawal, it is April 1^st  the year AFTER you turn 73.

What is the penalty for not taking a required minimum distribution?

The penalty for not taking your RMD is 25% of what you should have withdrawn.

What happens if I miss the RMD deadline?

If you miss the RMD deadline of December 31^st or April 1^st for first timers the year after they turn 73, you will be required to pay an excise tax of 25% of the amount not taken. There is no grace period. You are required to withdraw the RMD by the deadline or you face penalties. You must immediately fill out Form 5329 and pay the associated excise tax amount. To streamline, on the check you send to the IRS, you should include your social security number, the current tax year, and Form 5329 in the memo section of the check.
If you realize you missed your RMD when you file taxes, you can include the Form 5329 with your tax return and the taxes will be included on the Form 1040.
However, if you believe that you missed the deadline for the RMDs due to a reasonable cause, you can request that the IRS waive the 25% excise tax. You will need to fill out Form 5329, provide your 1040 (taxes from the year), and a written explanation as to why you missed the RMD deadline.

About the Author

Mark Steber is Senior Vice President and Chief Tax Information Officer for Jackson Hewitt. With over 30 years of experience, he oversees tax service delivery, quality assurance and tax law adherence. Mark is Jackson Hewitt’s national spokesperson and liaison to the Internal Revenue Service and other government authorities. He is a Certified Public Accountant (CPA), holds registrations in Alabama and Georgia, and is an expert on consumer income taxes including electronic tax and tax data protection.

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