Life after retirement is a new beginning for everyone. But this new beginning is also accompanied by some financial responsibilities, one of which is RMD – Required Minimum Distribution. The Internal Revenue Service (IRS) in the US has recently issued an important reminder alerting retirees aged 73 years or older about the deadline for taking RMDs.
If you are also a retired citizen or someone in your family who has retirement savings accounts (such as IRA, 401(k), etc.), then this information is very important for you. In this article, we will explain all the important things related to RMD in simple language.
What is RMD?
RMD means that after a certain age, you have to withdraw a minimum amount every year from your retirement savings account. This amount is determined by the government so that tax can be collected on tax-free savings over time.
Which accounts are eligible for RMDs?
- Traditional IRA
- SEP IRA
- SIMPLE IRA
- 401(k)
- 403(b)
- Other Retirement Savings Accounts
Not applicable to Roth IRAs, but they have their own rules (discussed below).
What age does RMD start?
The age for taking RMDs was 72 years, but the SECURE 2.0 Act raised it to 73 years (for those born between 1951 and 1959). This means that as soon as you turn 73, taking RMDs becomes mandatory.
How is RMD determined?
The RMD amount is determined through the IRS’s Uniform Lifetime Table, taking into account your account balance and life expectancy. If you find it difficult to do this calculation, you can take help from the IRS website or your financial advisor.
What happens if you don’t take your RMD?
If you don’t take your RMD on time, you can be imposed a strict penalty by the IRS.
- Earlier it was a 50% penalty.
- But from 2023, it has been reduced to 25%.
- If you correct the mistake in time, this penalty can be reduced to 10%.
Example: If your RMD amount was $5,000 and you did not withdraw, you may have to pay a penalty of $1,250 (25%).
Roth IRA and RMD
Roth IRA account holders are not required to take RMD, but this only applies to the lifetime of the account owner.
If you are the beneficiary (i.e., you get the Roth IRA after someone), the RMD rules will apply.
To avoid this, you can roll workplace Roth accounts (such as a 401(k) Roth) over to a Roth IRA.
Why does the IRS insist on RMDs?
When you made your retirement savings, it was tax-free or tax-deferred. The IRS now wants it to be taxed so the government gets its share. That’s why it’s important to take RMDs on time — it pays taxes and puts your funds to good use.
Easy steps to take RMDs on time
1. Know the deadline: RMDs must be taken by December 31 each year.
First-time RMD takers can delay it until April 1 of the following year, but then they’ll have to take it out twice that year.
2. Do the calculations correctly: Use the IRS’s tables or ask your financial planner for help.
3. Set it up automatically: Many financial companies offer auto RMD services, which leave no room for error.
4. Keep records: Keep proof of every transaction so that there is no mistake in the tax return.
Rules for RMD and Beneficiaries
If you have made someone the beneficiary of your retirement account, then the RMD rules are different for them too:
- Spouse beneficiary: They can transfer the account to their name, and the rules are different.
- Non-spouse beneficiary: They usually have to withdraw the entire amount within 10 years.
Why is it important to take RMD seriously?
RMD is not just for tax, but it is also related to your financial security. If you do not take an RMD, then apart from the penalty, there may be a problem in paying tax. Apart from this, withdrawing money on time also helps in balancing your expenses.
Conclusion
The Internal Revenue Service (IRS)’s frequent reminders about RMDs show how important this topic is for retirees. If you are 73 or older and have retirement accounts, don’t forget to take an RMD every year. Mistaking it by mistake can lead to penalties and tax problems. If it’s a Roth IRA, there are different rules – especially when the account is transferred to a beneficiary. Keep in mind – maintaining financial security in retirement is not just about savings, but taking the right steps at the right time is just as important.
FAQs
Q.1 Why is it necessary to take RMD?
A. The IRS makes RMD mandatory to collect tax. A penalty is imposed for not taking it.
Q.2 Do RMDs apply to all accounts?
A. No, RMDs are not applicable during the Roth IRA account holder’s lifetime.
Q.3 What happens if you don’t take an RMD on time?
A. A penalty of up to 25% is applicable, which can be as high as 10% if you correct it early.
Q.4 Can I withdraw more than the RMD?
A. Yes, but taxes will be due on the excess amount.
Q.5 What tools are there for RMD calculations?
A. The IRS and financial institutions provide RMD calculators.
