Picture: A detail of the Internal Revenue Service (IRS) headquarters building is seen in the Federal Triangle section of Washington, on April 27, 2020. (Chip Somodevilla/Getty Images)
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The IRS is reminding retirees who turned 72 last year that, in most cases, they face an April 1 deadline to take their first payment from their workplace retirement plans or face penalties.
Americans can’t keep their retirement funds in their accounts indefinitely. When they turn 72, they generally have to start withdrawals from their plans, such as from traditional individual retirement accounts (IRA), 401(k)s, and other workplace retirement plans.
These withdrawals, called required minimum distributions (RMD), are normally made by the end of the year. But a special rule that applies to people who turned 72 in 2022 lets such individuals wait until April 1 to take their first required withdrawal.
The IRS also said in its advisory on March 9 that anyone who reached age 72 last year must then take a second payment by Dec. 31. Those who fail to meet the deadlines face the prospect of significant tax penalties.
People who don’t take any distributions, or if the amounts aren’t large enough, may have to pay a 50 percent excise tax on the amount that should have been withdrawn. For example, if the RMD for a retiree is $10,000 for a given year and they fail to withdraw that amount by the deadline, they face a $5,000 penalty.
However, the penalty may be waived if the owner of the retirement account can establish that the shortfall was due to a “reasonable error” and that “reasonable steps” are being made to address the problem. Instructions to Form 5329 (pdf) provide details about how taxpayers can ask the IRS to waive the tax penalty for “reasonable cause.”
The April 1 deadline for people who turned 72 last year applies only to the required distribution for the first year; the deadline for taking RMDs for subsequent years is Dec. 31 of a given year. This means that taxpayers who get their first RMD (for 2022) on or before the April 1 deadline must receive their second RMD (for 2023) by Dec. 31.
For this group of retirees, the first RMD is taxable in 2023 and reported on the 2023 tax return.
The RMD rules apply to people who own traditional and Simplified Employee Pension (SEP) plans, and SIMPLE [Savings Incentive Match Plan for Employees] IRAs while the original owner is alive. Roth IRAs don’t require withdrawals until after the owner’s death.
RMDs also apply to individuals who participate in various workplace retirement plans, including 401(k), 403(b), and 457(b) plans.
Postponing Some RMD Deadlines Possible
While the April 1 deadline is mandatory for those in traditional IRAs and workplace retirement plans, there’s an exception that lets some people with workplace plans wait longer to get their RMDs. Specifically, most people with workplace plans who are still working for their employer can wait until April 1 of the year after they retire to start receiving RMDs.
This exception doesn’t apply to participants in SEP and SIMPLE IRA plans, however. It also doesn’t cover the 5 percent contributed by owners of the business sponsoring the retirement plan.
There are also special rules that may apply to employees of public schools and some tax-exempt organizations with 403(b) plan accruals before 1987. Such individuals are advised to check with their plan administrators or employers for how to handle these accruals, the IRS notes.
Calculating the RMD
The IRS provides a resource in the form of worksheets that can be used to calculate the required minimum distribution amounts.
There are two RMD worksheets. The first is to be used in cases in which the person’s spouse is the sole beneficiary of their IRA and is more than 10 years younger than the IRA owner; the second worksheet is for everyone else.
There are also special rules for people who inherited IRAs or retirement plans from the original owner.
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