If you were born in 1950, Uncle Sam has his eye on you right now.
That’s because April 1, 2023, is the deadline to take your first required minimum distribution (RMD), essentially a mandatory withdrawal of a minimum amount of money from retirement accounts. That withdrawal is generally considered taxable income.
This initial deadline applies to people who turned age 72 in 2022, with a few exceptions. Following is a look at who is affected and how — and why recent changes to the law governing RMDs don’t affect everyone.
The Secure 2.0 Act doesn’t help those who turned 72 last year
At the end of 2022, Congress passed an update to a 2019 federal law known as the Setting Every Community Up for Retirement Enhancement (Secure) Act. The new law, dubbed the Secure 2.0 Act, raised the starting age for RMDs to 73, and raises it again at a later date.
The catch is that the starting age of 73 only applies to people who turn 73 on or after Jan. 1, 2023. So this is how RMD age requirements stand now:
- Age 72 is when you take your first RMD if you reached that age in 2022.
- Age 73 is when you take your first RMD if you reach that age sometime from 2023 though 2032.
- Age 75 is when you take your first RMD if you turn 74 in 2033 or later.
There are some exceptions
Some older workers with workplace retirement plans may be able to postpone their initial RMD, regardless of whether they would otherwise have to start withdrawing RMDs at age 72, 73 or 75. As the IRS recently reiterated:
“Most participants who are still working for that employer can wait until April 1 of the year after they retire to start receiving these distributions, if their workplace plan allows. This RMD exception does not apply to 5% owners of the business sponsoring the retirement plan or to participants in SEP and SIMPLE IRA plans. See Tax on Excess Accumulation in Publication 575 for details.”
Brace for two withdrawals in one year
For those whose first RMD is due April 1, 2023, the 2023 tax year — meaning the one for which returns are due by April 2024 — might be rougher than usual. That’s because the IRS gives three months of leeway to withdraw your very first RMD, but for all your subsequent RMDs, the deadline will always be Dec. 31 of each tax year.
As a result, those who turned 72 in 2022 are required to take their first RMD by April 1, 2023, and their second by Dec. 31, 2023. Having to withdraw two RMDs in one tax year could significantly increase your taxable income for 2023 and, in turn, significantly increase your tax bill that is due by April 2024. The IRS explains:
“Even though the first distribution is actually the required 2022 distribution, it’s taxable in 2023 and reported on the 2023 tax return — along with the regular 2023 distribution.”
The penalty for missed RMDs
Failure to take a required minimum distribution could result in hefty penalties. The penalty amount is equivalent to a significant percentage of the RMD amount you fail to take on time.
For the 2022 tax year, that percentage is 50%.
For the 2023 tax year and thereafter, the penalty is 25%, although it may be possible to reduce the penalty if you correct the mistake by Tax Day.
Types of accounts subject to RMDs
RMDs apply to most but not all types of retirement plans. According to the IRS, these types are subject to RMD rules:
- Traditional IRAs
- SEP IRAs
- SIMPLE IRAs
- 401(k) plans (except as noted below)
- 403(b) plans (except as noted below)
- 457(b) plans
- Profit sharing plans
- Other defined contribution plans
Roth IRAs are an exception, but only for their original owners. So if you have a Roth IRA that you opened for yourself, you will not be required to withdraw RMDs from it during your lifetime. If the account later passes on to a beneficiary, however, the beneficiary will have to withdraw RMDs from it.
In the future, Roth 401(k) and Roth 403(b) plans also will become exceptions. The IRS recently explained:
“Designated Roth accounts in a 401(k) or 403(b) plan are subject to the RMD rules for 2022 and 2023. However, for 2024 and later years, RMDs are no longer required from designated Roth accounts. 2023 RMDs due by April 1, 2024, are still required.”
How RMD amounts are determined
The amount of a required minimum distribution depends on how much money is in the account at the end of the applicable tax year and how long the government expects you to live.
An RMD calculator available on Investor.gov can give you an idea, and worksheets and detailed instructions to calculate the figure yourself are available from the IRS.