Thursday, February 2, 2023

Avoid the Penalty: People 72 and Older Should Start Taking Money Out of IRAs and Retirement Plans

NEW YORK — The IRS reminded people who were born on or before Monday in 1950 that funds in their retirement plans and individual retirement arrangements face important upcoming deadlines for required minimum distributions and avoid penalties.

Required minimum distributions, or RMDs, are the minimum amount that many retirement plan and IRA owners are typically required to withdraw annually after reaching age 72. Account owners can delay taking their first RMD until April 1 of the next calendar year in which they reach age 72, or retire into a workplace retirement plan. RMDs are taxable income and may be subject to penalties if not taken on time.

IRA: RMD rules require holders of traditional IRAs and SEP, SARSEP and SIMPLE IRAs to begin receiving distributions at age 72, even if they are still working. Account holders who turn 72 in 2022 should take their first RMD by April 1, 2023, and their second RMD by December 31, 2023, and every year thereafter.

retirement plans: in 401(k), 403(b), and 457(b) plans; profit sharing and other defined contribution plans; and defined benefit plans, the first RMD is payable on April 1 of the previous year in which they reach age 72 or the participant is no longer employed (if permitted by the plan). The employer’s 5% owner must begin taking RMDs at age 72.

RMDs cannot be rolled over to another IRA or retirement plan. See an RMD comparison chart here that highlights some of the basic RMD rules that apply to IRAs and defined contribution plans. Roth IRAs do not require distributions as long as the original owner is alive.

50% tax on RMD computation and lost distributions

An IRA trustee, or plan administrator, must report the RMD amount to the IRA owner or offer to calculate it. An IRA owner or trustee must calculate the RMD separately for each IRA owned. They may be able to withdraw the entire amount from one or more IRA accounts. However, the RMD for workplace retirement plans must be taken separately from each plan.

Failing to take a required distribution, or not making a sufficient withdrawal, may mean a 50% excise tax on the undelivered amount. The IRS has a spreadsheet for calculating RMDs and payment periods.

Inherited IRAs

RMDs may be required for an IRA, retirement plan account, or account Ira Roth Inherited from the original owner. See the topic Retirement – Beneficiary for information on how to take RMDs from an inherited IRA or retirement account and report the taxable distribution as part of gross income.

Publication 559, Survivors, Executors, and Administrators, can help complete estates and file federal tax returns and explains their responsibility to pay taxes owed on behalf of the decedent.

Distribution related to COVID-19, 2020

Since RMDs were waived in 2020, an account owner or beneficiary who received an RMD in 2020 has the option to return it to his or her IRA or other qualified plan to avoid paying taxes on that distribution. There was an option. A 2020 RMD that qualifies as a coronavirus-related distribution can be withdrawn over a three-year period or the distribution is taxed over three years. 2020 withdrawals from an inherited IRA cannot be rolled back to the inherited IRA, but can be spread over three years for income inclusion. For more information, see the Coronavirus Tax Relief for Retirement Plans and Individual Retirement Savings Plans (IRAs) page.

Taxpayers can find forms, instructions, publications, FAQs about required minimum distributions, and other easy-to-use tools at IRS.gov.

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