Many retirees age 72 or older are up against a potentially costly tax deadline.
Folks that age who own certain types of retirement accounts generally must withdraw what the IRS calls a “required minimum distribution,” or RMD, by Dec. 31 of every year, as the IRS recently reminded taxpayers. Those who miss their RMD deadline face a whopping 50% tax penalty — which could translate to hundreds or thousands of dollars.
RMDs are a minimum amount of money that the IRS requires you to withdraw from most types of retirement accounts each year, typically starting the year in which you turn 72.
There are exceptions to the age aspect of this rule for people who:
Turned 70½ in 2019 or earlier. Their RMDs likely started the year in which they turned 70½. This is because RMDs previously started at that age. A 2019 federal law, known as the Setting Every Community Up for Retirement Enhancement Act, or Secure Act, changed the RMD age from 70½ to 72.
Are working and have a workplace retirement plan that allows postponement of RMDs. For such workers, their first RMD may not be due until they retire.
There are also exceptions to the Dec. 31 deadline for people who:
Turned 72 during 2022. For these folks, their RMD for 2022 will be their very first RMD, so they get an extended deadline this one time. Specifically, the IRS gives these folks until April 1 of the following year to take their initial RMD, so those who turned 72 this year have until April 1, 2023.
Are working and have a workplace retirement plan that allows postponement of RMDs. These workers also get an extended deadline for their very first RMD: The IRS gives them until April 1 of the year after they retire.
Whatever your deadline may be, if you fail to withdraw an RMD in full and on time, the IRS could penalize you. The amount of this penalty is equal to 50% of whatever RMD amount you failed to withdraw on time.
Say your RMD for 2022 is $10,000, and it’s due by Dec. 31. If you fail to withdraw it by then, you could be looking at a fine of $5,000.
The types of retirement accounts to which RMDs apply include:
Traditional individual retirement account — IRA
Simplified employee pension — SEP
Savings incentive match plan for employees — SIMPLE IRA
Roth IRAs are not subject to RMDs during the original account owner’s lifetime, as we note in “7 Secret Perks of Individual Retirement Accounts.”
The exact amount of an RMD depends on your life expectancy and retirement account balances. The IRS offers worksheets to help you determine your RMD amount.
Your retirement plan manager might compute your RMD for you, but the IRS warns that taxpayers themselves are ultimately responsible for getting their RMDs right:
“Although the IRA custodian or retirement plan administrator may calculate the RMD, the IRA or retirement plan account owner is ultimately responsible for calculating the amount of the RMD.”
Beware the extended RMD deadline
To recap, the RMD deadline schedule now is as follows:
Initial RMD: April 1 of the year after you turn 72 or, if allowed, April 1 of the year after you stop working
All subsequent RMDs: Dec. 31
This doesn’t necessarily mean that people who have until April 1, 2023, to take their 2022 RMD should wait, though.
If you postpone withdrawing your initial RMD until the following calendar year, you would end up having to withdraw two RMDs in that calendar year: your first RMD by April 1 and your second RMD by Dec. 31.
As a result, you’d likely owe taxes on both of those RMDs in the same year, as RMDs are generally taxable income. And that could hike your tax bill for that year.
Fortunately, you can avoid that potential spike in your taxes by not postponing that very first RMD. For example, if your initial RMD is for 2022, withdraw it during 2022 rather than early 2023. That way, you won’t have to withdraw both your first and second RMDs in 2023.