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If you turned 72 in 2022, the last chance for your first mandatory retirement plan withdrawal is April 1 – or you could face a hefty tax penalty.
Typically, you must begin these annual withdrawals, known as required minimum distributions, or RMDs, by a certain age. Before 2020, RMDs started at age 70½, and the Secure Act of 201[ads1]9 raised the starting age to 72. In 2022, Secure 2.0 raised the age to 73, which starts in 2023.
While the annual deadline for RMDs is December 31st, there is a special exception for the first year, which pushes the due date to April 1st.
Secure 2.0 RMD rules create confusion
Brett Koeppel, a certified financial planner and founder of Eudaimonia Wealth in Buffalo, New York, said Secure 2.0 has added to the confusion about who needs to withdraw money from retirement accounts and when.
Although Secure 2.0 raised the starting age for RMDs to 73 starting in 2023, retirees who turned 72 in 2022 still have to withdraw the funds by April 1 to avoid a “very steep” penalty, Koeppel said.
RMDs apply to both pre-tax and Roth 401(k)s and other workplace plans, along with most individual retirement accounts. There are no RMDs for Roth IRAs until after the account owner’s death.
The amount you need to withdraw annually for RMDs is usually calculated by dividing each account’s previous December 31st balance by a “distribution period” published annually by the IRS.
Secure 2.0 reduced the RMD penalty
If you skip the RMD or don’t withdraw enough, there is a 25% penalty applied to the amount you should have withdrawn. Secure 2.0 reduced the penalty to 25% from 50% starting in 2023, with the option to reduce it further to 10% if you take your lost RMD during the “correction window.”
The correction window is usually the end of the second tax year following the year of the missed RMD, explained George Gagliardi, a CFP and founder of Coromandel Wealth Management in Lexington, Massachusetts.
“I’ve had clients miss RMDs in the past, and I was able to fix it in those cases by taking the RMD as soon as possible,” he said, which included filling out the year’s Form 5329 for the missed the RMD, and said “reasonable cause” on the penalty line, writes a letter of explanation and sends both documents to the IRS.
“In the past, the IRS was lenient on lost RMDs, but with the new reduced penalties, they may be more aggressive,” he said. – We will see how this turns out over time.
The downside to waiting to take your first RMD
If you delay your first RMD until April, the second still falls due by Dec. 31, doubling your RMD income for the year, Gagliardi said.
“If it’s a small amount, it won’t have that much impact on their tax situation,” he said. “But if they have large tax-deferred accounts, that double hit in one year may well push them up into a different tax bracket,” resulting in tax issues such as higher Medicare premiums or making it harder to deduct medical expenses.
Gagliardi said he never recommends waiting until April 1 to begin first-year RMDs “unless your income and tax situation warrants it.”