Once an individual reaches the age of 72, they need to start taking required minimum distributions (RMDs) from their retirement plans or IRA accounts to avoid penalties. Optima Tax Relief explains what RMDs are and how to avoid penalties.
Retirement funds cannot be kept in an account forever. By age 72, minimum withdrawals must be made each year, even if the individual is not retired yet. These withdrawals are known as required minimum distributions. There are some differences in the rules surrounding RMDs depending on the account type. For example, Roth IRAs don’t require withdrawals until after the account owner’s death. Upon that death, the beneficiaries of the account will then be subject to the RMD rules.
IRA account holders who reached age 72 in 2022, must take their first RMD by April 1, 2023, and their second by December 31st of each year after, starting in 2023. For other retirement plans, including 401(k), 403(b) and 457(b) plans, profit-sharing plans, and defined benefit plans, the first RMD is due by April 1st of the year they reach age 72. Some plans allow the individual to wait until they are no longer working.
RMD amounts are usually reported to the account owners before they’re due. Essentially, the amount is determined by taking the account balance and then dividing it by the distribution period. A distribution period is a pre-determined number assigned to an age to help calculate RMDs. For example, the distribution period for age 72 is 27.4. If an individual has $500,000 in their IRA account, their RMD for that year would be about $18,248. Individuals may withdraw more than the RMD. More importantly, if they do not take the RMD, or less than the RMD for that year, they will be subject to a 50% excise tax on the undistributed amount. For example, if the same individual did not take the RMD, they could owe the IRS a penalty of $9,124. The situation becomes more complex if the account owner is no longer living.