If you are a taxpayer, you are required to take annual Required Minimum Distributions (RMDs) from your IRA and retirement plans when you reach age 72. Every year as the new year begins, the IRS reminds us that if you were born in 1950 or earlier, funds in your individual retirement accounts and retirement plans are subject to upcoming deadlines for required minimum distributions. If you fail to make these distributions, you are subject to penalties.
What Types of Retirement Plans Require Minimum Distributions?
All employer-sponsored retirement plans require minimum distribution. These include profit-sharing plans, 401(k) plans, 403(b) plans, and 457(b) plans.
Traditional IRAs are also subject to the minimum distribution requirements. Additionally, Roth 401(k) accounts and IRA-based plans such as SEPs, SARSEPs, and SIMPLE IRAs require minimum distributions. Roth IRAs do not require any distributions while the original owner is alive.
If you have a 401(k), 403(b), or 457(b) plan, your first RMD is due by April 1 of the later of the year you reach age 72. This also applies if you have an interest in a profit-sharing or other defined contribution or defined benefit plan. If you are no longer working, your first RMD is due by April 1 of the later of the year they reach age 72, if you are a 5% owner of the employer, you must begin taking the required minimum distributions once you turn 72.
If you have a traditional IRA, SEP, SARSEP, or SIMPLE IRA, you must make these required distributions at age 72, even if still employed. For taxpayers who reached age 72 in 2022, you must take your first RMD by April 1, 2023, and your second RMD by December 31, 2023. This is an annual requirement that must be repeated in the following years.
If you inherited an IRA or retirement plan account, you may be subject to making required minimum distributions.
Can I Take an RMD From One Account Instead of Separately From Each Account?
An RMD is calculated separately for each of your accounts subject to the RMD rules. However, you may withdraw the total amount from one or more of your IRAs. Also, if you own a 403(b), you must calculate the RMD separately for each 403(b) owned contract, but you may take the total amount from one or more of the 403(b) contracts. Note that distributions required from other types of retirement plans, including 401(k) and 457(b) plans, must be taken separately from each of these accounts. RMDs may not be rolled over to another IRA or retirement plan.
How Do I Calculate the Amount of the Required Minimum Distribution?
You divide the balance of the account as of the prior December 31 by a life expectancy factor published by the IRS. Your plan administrator or the trustee of your IRA must either report the amount of your required minimum distribution to you as the IRA owner. Alternatively, your plan administrator or the trustee of your IRA must offer to calculate it for you.
RMDs were waived in 2020 because of the coronavirus. If you were subject to a 2020 RMD that qualified as a coronavirus-related distribution, you may repay it over three years or have the taxes due on the distribution spread over three years. A seasoned tax professional can help interpret and understand the tables provided by the IRS to assist you with these calculations.
What If I Fail to Make an RMD?
If you fail to take a required distribution, or do not withdraw enough from your account(s), you are subject to a 50% excise tax on the amount that you failed to distribute. This penalty may be waived if you show that the incorrect amount was due to reasonable error. You must also establish that you are taking reasonable steps to correct the shortfall. However, you must file the appropriate paperwork to qualify for this relief. THE TAX EXPERTS can help you in this situation.
Talk to a Qualified Tax Professional!
If you live in New York or the Tri-State area and have any questions about any tax-related issue, including required minimum distributions (including those required in 2020 and coronavirus-related), call 212-490-0704 today for a FREE consultation. You can also learn more online here – THE TAX EXPERTS. We can help you maximize your tax savings for 2022, as well as help you plan now to save on your 2023 tax bill!
