As an IRA or tax-deferred retirement account holder, it’s crucial to know when you must start taking Required Minimum Distributions (RMDs). Under the SECURE 2.0 Act, RMD age requirements are changing: from 72 to 75 over the next decade. Individuals born between 1951 and 1959 must take RMDs at age 73, while those born in 1960 or later can wait until they turn 75.
The purpose of RMDs is to ensure you use your retirement funds while you’re still alive, rather than using them as a tax-free estate planning tool for your heirs. RMD amounts depend on your age and account balance as of December 31 of the previous year. 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, require RMDs.
Your first RMD must be taken by April 1 of the year after you reach RMD age. Avoid taking two RMDs in one year as it could bump up your tax bracket and Medicare premiums. In case you miss an RMD, the SECURE 2.0 Act reduces the excess accumulation penalty tax from 50% to 25%. You can reduce the penalty to 10% if you correct the shortfall within the correction window, which begins on January 1 of the year following the shortfall and ends on the earlier of the IRS mailing a Notice of Deficiency, penalty assessment, or the last day of the second tax year after the penalty is imposed.
To avoid penalties, take RMDs on or before December 31st of every year. If you encounter a shortfall due to a reasonable error, file IRS Form 5329 and a letter explaining the error to request a penalty waiver. Make up for the RMD shortfall by taking a catch-up distribution from your retirement account.
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This article is not professional tax or legal advice for your specific circumstances. Consult with your professional adviser to better understand how these items may impact you, or how they’ve changed
