Retirement account owners above a certain age must take annual distributions from their accounts each year, known as required minimum distributions. Failure to take the full distribution can incur a penalty.
The good news is that the penalty recently was reduced.
The beginning age for RMDs changed several times in recent years from 72 for those born before 1951, 73 for those born from 1951 through 1959, and 75 for those born in 1960 or later.
The current rule is the first RMD must be taken by April 1 of the year following the year you turn 73. If you turn 73 in June 2025, you have until April 1, 2026, to take that first RMD.
The RMD is computed by taking the traditional IRA balance as of December 31 of the previous year and dividing it by your life expectancy factor from the tables in the back of IRS Publication 590-B, available free on the IRS website.
Most people use Table III; married people whose spouses are more than 10 years younger than they are use Table II. Beneficiaries use Table I.
When you have multiple IRAs, compute the RMD separately for each IRA. Then, if you want you can aggregate the RMDs and take the total from the traditional IRAs in any ratio you want.
RMDs also must be taken from 401(k)s and other traditional retirement accounts. But you can’t aggregate RMDs from those accounts. They must be computed and taken from each account.
It’s important to distribute at least the full amount of the RMD by December 31. The IRS realized some years ago that many people weren’t taking RMDs or calculated them incorrectly. So, the IRS stepped up its tracking and enforcement of RMDs and is quick to impose penalties.
Thanks to a recent law, the penalty is only 25% of the amount that should have been distributed but wasn’t, instead of the longstanding 50%.
In addition, the penalty can be reduced to 10% if the mistake is corrected in a timely manner.
To qualify for the 10% penalty, you generally must correct the mistake by taking the RMD before the IRS sends you a notice of deficiency or before the last day of the second taxable year that begins after the year in which the RMD should have been taken, whichever is earlier.
The penalty can be avoided completely by convincing the IRS to waive it because you had a reasonable cause for missing the RMD.
But there’s no guarantee the IRS will waive the penalty. If you take the time to apply for a waiver and the IRS denies the request, then it probably will be too late to qualify for the 10% penalty and you’ll be stuck with the 25% penalty.
Most IRA custodians compute RMDs for their customers and include it in at least one of the monthly statements or the online account.
But you don’t want to rely on this computation. In a recent case, an IRA owner was hit with a penalty by the IRS because the custodian had the wrong birth date for the customer in its records and computed the wrong RMD amount. The taxpayer lost the case and had to pay the penalty.
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