If you have a tax-deferred IRA, you will be subjected to required minimum distributions.
The Required Minimum Distribution (RMD) is the amount you must withdraw from your IRA once you hit retirement age. It only applies to traditional and SIMPLE and SEP IRAs.
The IRS helps you determine how much you must withdraw, which they base on the fair market value of your retirement account and your life expectancy. The safeguard is put in place to ensure that you pay taxes on the tax-deferred funds since you don’t pay taxes until you withdraw the funds. Roth IRAs don’t require minimum distributions because you contribute after taxes.
When do you Have to Take a Required Minimum Distribution?
Up until this year, you had to take your RMDs starting at age 70 ½. Your distributions were required to start the year that this age occurred or at least by April 1 of the following year. The Setting Every Community Up for Retirement Enhancement (SECURE) created 2020 RMD changes. According to this act, the new age for RMDs is 72 and has the same deadline as April 1 of the year following the year you turn 72.
If you already turned 70 ½ and started taking your RMDs, though, you must continue doing so – the act is for those who haven’t’ yet started taking RMDs. Another change the IRS has implemented as of this year is the life expectancy chart. This is how they determine the amount you must withdraw from your IRA each month. The new chart reflects longer life expectancies, which means you may have lower required minimum distributions so that the money lasts you longer.
What Happens if you Don’t Take the Required Minimum Distribution?
If you neglect to take the RMD or don’t withdraw enough, the IRS levies a hefty penalty to the tune of 50%. For example, if you were supposed to withdraw $3,000 and you didn’t, you’ll be hit with a $1,500 penalty tax.
If you miss a withdrawal, you may be able to take the following steps:
- Complete IRS Form 5329 and pay the appropriate excise tax (50%)
- Apply for a waiver if you feel you are owed one
What you Need to Know About RMDs
Make sure that you use the IRS’s latest tables when figuring out your RMD as each situation differs. There are different tables regarding different situations, especially if your spouse is your beneficiary. Your spouse’s age plays a role in the amount you must withdraw as there is a table for spouses that are 10 years younger than you and a table for spouses that are the same age.
The most important thing to know is when you must take RMDs and how much you must take. With the 2020 RMD changes, there will be a delay for some people, or a window where you don’t have to withdraw funds because of the older age. It’s important, however, to know beyond a reasonable doubt how much you must withdraw and when in order to ensure you won’t owe excessive tax penalties.