The tax agency’s warning applies to people born before 1951, who face possible penalties if they don’t take minimum distributions from their retirement plans.
The Internal Revenue Service (IRS) is warning seniors born before 1951 that they are required to take minimum distributions from their retirement plans by the end of the year or face possible penalties.
Required minimum distributions (RMD) are amounts that many owners of individual retirement arrangements (IRA) or other retirement plans must withdraw each year—even if they’re still working.
For 2023, the Secure 2.0 Act raised the age requirement (from 72 to 73) for account owners to have to start taking the mandatory distributions from their retirement funds. This means that people born before 1951 face a Dec. 31 deadline to take the distributions—or face a possible penalty.
“RMDs are taxable income and may be subject to penalties if not timely taken,” the IRS warned in a Dec. 20 announcement.
Penalties In Focus
Account owners who fail to withdraw the full amount of the RMD by the deadline face a 25 percent excise tax on the amount not withdrawn. The penalty may be reduced to 10 percent if the RMD is corrected within two years, the IRS says.
It’s even possible for the penalty to be waived entirely if the account owner can prove that the shortfall in distributions was due to “reasonable error” and that they’re taking “reasonable steps” to remedy the shortfall.
To qualify for penalty relief, taxpayers must file Form 5329 and attach a letter explaining their situation.
The RMD rules require individuals to withdraw from their IRAs every year once they reach the age of 72 (or 73 if the account owner reaches 72 in 2023 or later). This holds true for those who are still employed.
An exception to this requirement is Roth IRAs, whose owners are not required to take RMDs during their lifetime. However, the beneficiaries of a Roth IRA are subject to the withdrawal rules after the account owner’s death.
The rules also apply to employer-sponsored retirement plans—including profit-sharing plans and 401(k) plans—although participants in such plans can delay taking RMDs until they retire. An exception is part owners of the business that is sponsoring the plan (with an ownership stake of at least 5 percent).
By Tom Ozimek
