Retirees who will turn 73 this year have an important deadline coming up to avoid a costly tax penalty. The first required minimum distribution (RMD) year must be taken by April 1 of the year after they turn 73. Failing to meet this deadline could result in a costly 25% penalty. This penalty only applies to the amount that you were required to withdraw but failed to do so.
Although the general, annual deadline for subsequent RMDs is December 31 of each respective year, the first RMD provides a reprieve. Contrary to the IRS guidance, financial advisors overwhelmingly recommend withdrawing the first RMD by December 31 of the year you turn 73. This avoids the potential pitfall of taking two RMDs in the same calendar year, which could increase the retiree's tax burden.
Not taking the required minimum distribution can be a costly mistake. The IRS charges a 25% penalty on the amount that you fail to withdraw.
There is overriding optimism for those who pastorally miss the deadline or over-withdraw. The IRS can waive the penalty down to 10% if they fix the mistake in a timely manner. To be eligible for this reduced fee, the correct amount has to be taken out in two years. A Form 5329 will need to be filed to fix the error.
In fact, the IRS can go so far as to waive the penalty in certain scenarios. This is permitted if the shortfall was due to a good faith mistake. Second, the retiree needs to be making good faith efforts to correct the problem.
If you miss [the RMD], own up to it.
Scott Bishop, partner and managing director of Presidio Wealth Partners, based in Houston
To compute RMDs, use the account balance as of December 31 of the prior year. Next, take that balance and divide it by the “life expectancy factor” determined by the IRS. Another fact worth emphasizing is that Roth accounts do not have RMDs, except after the account owner’s death.
