Question: I will be turning 72 later this year and I know that I have to begin taking my required minimum distribution. I have heard that there are penalties assessed by the IRS if I do not take the distribution correctly, can you explain this to me?
Answer: You are correct, the general rule is that you must take your required minimum distribution (“RMD”) when you reach 72. However, you can delay taking that first RMD until April 1st of the year following the year that you turn 72. For example, if you turn 72 on December 15, 2021. You can elect to take your first RMD by December 31, 2022, or you can wait and take it on or before April 1, 2023. It is important to note that if you delay taking your first RMD until 2023, you will have to take two RMDs in 2023, one for the delayed first year (2022), in this case due by April 1, 2023 and one for 2023, which you must take by December 31, 2023.
The most common mistake people make with IRAs and other retirement accounts is that they forget to take the RMD each year. With the exception of the first year, RMDs must be taken by December 31st each year. If you fail to take your full RMD by December 31st, the IRS will impose a 50% penalty on the amount that you did not take on time. With the harsh penalty imposed for missing the December 31st deadline, it may be advisable to have the financial institution set your RMD to automatically withdraw from the IRA account on a certain date each year.
The amount that of your RMD each year is based on a calculation which includes all of your retirement accounts. Retirement accounts include:
- Traditional IRAs’;
- Simple IRAs;
- Profit-sharing plans;
- Roth 401(k) plans;
- 457(b) plans;
- 401(k) plans; and
- 403(b) contracts.
Your annual RMD calculation is based on the December 31st balance of the account in the prior year and your age. If you have multiple IRAs, you can add those balances together and treat the RMD calculation as if you have one large IRA. This rule also applies to 403(b) contracts. Keep in mind that 401(k) and 457(b) accounts cannot be added together and must be calculated separately. You cannot take an IRA distribution from a 403(b) account or a 401(k) distribution from an IRA account. RMDs from 401(k), 457(b) and profit-sharing plans also cannot be calculated together. For these accounts, each RMD must be calculated separately and taken from that account.
RMD requirements are a part of life for those who have used the benefit of an IRA or other retirement account to defer taxes on their income during their working years. While you cannot escape the requirement, by understanding some of the finer points, you can avoid costly penalties from the IRS.