Attention Seniors: Don’t Miss This Year-End IRS Deadline or Risk Significant Financial Losses

Retirees aged 73 and older, or those reaching this milestone in 2023, are facing an important tax obligation as the year draws to a close.

Individuals in this age group who possess retirement accounts are generally required to withdraw what is termed a required minimum distribution (RMD) by December 31 each year. Failure to meet this RMD deadline could result in a hefty penalty of up to 25%, potentially costing retirees hundreds or even thousands of dollars.

Understanding Required Minimum Distributions (RMDs)

A required minimum distribution (RMD) refers to the minimum amount that the IRS mandates individuals withdraw from designated retirement accounts annually, typically commencing the year they turn 73.

There are specific exceptions related to the age requirement for individuals who:

• Reached 72 in 2022 or earlier. This demographic likely began their RMD withdrawals in the year they turned either 70½ or 72. Historically, RMDs commenced at age 70½; however, the Secure Act of 2019 revised this age to 72, with the Secure 2.0 Act of 2022 further increasing it to 73 starting in 2023 and projected to rise to 75 in 2033.
• Are employed and have a workplace retirement plan that permits RMD postponement. For these individuals, the first RMD may be deferred until retirement.

Additionally, there are exceptions concerning the RMD deadline for individuals who:

• Were born in 1953. For these individuals, their initial RMD will occur in 2026, allowing an extended deadline—specifically, the IRS permits them until April 1 of the following year to withdraw their first RMD. Therefore, those turning 73 in 2023 have until April 1, 2027.
• Are employed with a retirement plan enabling RMD postponement. Such workers may have an extended deadline for their initial RMD, which can be postponed until April 1 of the year following their retirement.

Penalties for Non-Compliance

Regardless of the specific deadline, failing to withdraw an RMD accurately and on time can lead to penalties. The IRS imposes a 25% fine on any RMD amount not withdrawn in full by the deadline. However, this penalty can be reduced to 10% if rectified within two years, per IRS guidelines.

For instance, if the RMD for 2026 is calculated at $10,000 and the deadline is missed, the associated penalty could amount to $2,500.

Retirement Accounts Subject to RMDs

The following types of retirement accounts are generally subject to RMD requirements:

• Traditional Individual Retirement Accounts (IRAs)
• Simplified Employee Pension (SEP) IRAs
• Savings Incentive Match Plan for Employees (SIMPLE) IRAs
• 401(k) Plans
• 403(b) Plans
• 457(b) Plans
• Profit-Sharing Plans

Notably, Roth IRAs are exempt from RMD requirements during the original account owner’s lifetime. Additionally, starting in 2024, Roth 401(k) plans will also be free from RMDs as stipulated by the Secure 2.0 Act.

Determining Your RMD Amount

The specific RMD amount is contingent on a combination of life expectancy and the balances within retirement accounts. The IRS provides worksheets to assist in calculating the required amounts.

While retirement plan managers may compute RMDs for account holders, it is important to note that taxpayers bear ultimate responsibility for ensuring compliance with the correct RMD amounts:

“Although the IRA custodian or retirement plan administrator may calculate the RMD, the account owner is ultimately responsible for taking the correct RMD amount.”