The Internal Revenue Service (IRS) in the United States has issued a notice reminding retirees aged 73 and older to withdraw the required amount from their retirement accounts before the deadline of December 31 to avoid potential high penalties.
According to the notice released on December 10, individuals must withdraw the Required Minimum Distributions (RMDs) annually from traditional individual retirement accounts (IRAs), 401(k) plans, and other retirement plans. Failure to make the required withdrawals could result in the account holder facing a 25% tax penalty on the amount not withdrawn, which can be reduced to 10% if corrected within two years.
Account holders may be eligible for a full exemption from the penalty if they can demonstrate that any errors were “reasonable” and are being corrected. To apply for this exemption, the account holder must complete Form 5329 and provide an explanatory letter.
The IRS emphasizes that while IRA custodians or plan administrators can calculate the RMDs, the ultimate responsibility lies with the account holder to ensure the correct amount is withdrawn.
Changes introduced by the Secure Act 2.0 have raised the starting age for Required Minimum Distributions from 72 to 73, giving retirees more time to keep funds in their accounts. As per the updated regulations, starting in 2033, individuals will not be required to take mandatory withdrawals before turning 75.
In the December 10 notice, the IRS highlighted other updates brought by the Secure Act 2.0. These include the elimination of minimum distribution requirements for Roth accounts within employer-sponsored plans (such as 401(k) and 403(b)) starting in 2024. This change aligns these accounts with Roth IRA accounts, which have long been exempt from lifetime RMDs.
The updated RMD rules still apply to traditional IRAs and IRA-based plans. Once individuals reach the specified age, they are required to make withdrawals annually, even if still employed.
Employer-sponsored plans are also subject to the RMD rules, but withdrawals can be delayed until after retirement unless the participant owns more than 5% of the sponsoring company. While Roth IRA owners are not required to take withdrawals in their lifetime, beneficiaries are required to comply with RMD rules after the account owner’s death.
The IRS cautions beneficiaries inheriting retirement accounts to carefully adhere to the RMD rules, as these can vary based on the account holder’s date of death and the relationship between the beneficiary and the deceased. The updated rules introduce a “10-year rule” for most non-spouse beneficiaries, requiring the account to be fully withdrawn within ten years. However, certain eligible designated beneficiaries may be exempt, such as spouses, minor children, and individuals with disabilities or chronic illnesses.