Retirement Taxes Deadline: Required Minimum Distributions Must Be Taken By Dec. 31
The IRS is reminding retirement savers that required minimum distributions (RMDs) must be taken by Dec. 31 or their taxes could be affected.
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Waived in 2020 as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, RMDs are minimum amounts that retirement plan participants and individual retirement account owners must withdraw annually starting with the year they reach the age of 72 or, if later, the year they retire. However, Roth IRAs do not require distributions while the original owner is still living.
If the retirement plan account is an IRA or the account owner is working and contributing to an employer-sponsored retirement plan (while also being at least a 5% owner of the business), then RMDs begin at the age of 72, even if they’re still working.
Required minimum distribution apply to:
The owners of traditional Individual Retirement Arrangements (IRAs)
The owners of traditional Simplified Employee Pension (SEP) IRAs
The owners of Savings Incentive Match Plans for Employees (SIMPLE) IRAs
Participants in workplace retirement plans, including 401(k), Roth 401(k), 403(b) and 457(b) plans
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RMDs are based on the taxpayer’s life expectancy and their account balance. The IRS calculates the required minimum distribution for each account by dividing the prior Dec. 31 balance of that retirement plan account by a life expectancy factor that the IRS publishes in Publication 590-B.
RMD life expectancy tables are set to change in 2022. AARP reported that many people will have RMDs 6% to 7% smaller. However, taking smaller distributions is not recommended due to the increase in living expenses in retirement.
Under current rules, individuals whose 70th birthday was June 30, 2019 or earlier did not have an RMD for 2020, but are required to take one by Dec. 31 this year. Those who had their 70th birthday July 1, 2019 or later have their first RMD due by April 1, 2022.
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Not taking your required minimum distributions or withdrawing enough could result in a 50% excise tax on the amount not distributed.
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