Gone is the onerous 50% penalty, replaced with a lesser 25% one - one that's less likely to be waived. Image: Zhanna Hapanovich/Shutterstock.com
By: FEDweek StaffRequired minimum distributions (RMDs) have been in the financial/investing news a lot over the last several years. RMDs came into being when Individual Retirement Arrangements (IRAs) were introduced back in 1974. Their purpose was to make IRA owners withdraw from their accounts so that the Treasury could collect taxes on all the tax deferred money that had accumulated over time in IRAs. The age set for RMDs at that time was 70 ½.
To ensure that those over 70 ½ wouldn’t forget to take their required distributions, a 50% penalty was assessed on missed RMDs. This confiscatory penalty was enough to get the attention of IRA owners, and very few forgot to take out the required amount each year.
Since 2020 there have been a lot of changes surrounding RMDs. In 2020, the age when required distributions had to begin was raised to 72, and this year, it was raised to 73. In fact, SECURE 2.0 provides that in 2033 the age will increase again, this time to 75.
The deadline for taking your first RMD is April 1 of the year after the year in which you reach the specified age (e.g., 70 ½, 72, 73, or 75 depending on the rules in place when you hit the age). All subsequent RMDs have to be taken by December 31st. So, if you turned 72 in 2022, you would need to take your first RMD by April 1, 2023 and your second RMD by December 31, 2023. You would be taking two RMDs in one tax year.
This also causes some confusion for those who are 72 or 73 years old in 2023. Let’s say that I turned 72 in 2022, but plan to wait until April 1, 2023 to take my RMD. Does this mean that I don’t have to take that 2022 RMD because, after all, I’m turning 73 in 2023 and SECURE 2.0 states that I don’t need to begin taking RMDs until April 1st of the year after I turn 73? Unfortunately not, the requirement to take a minimum distribution is governed by the law that was in effect at the time I turned the appropriate age. Well, when I turned 72 in 2022, the law clearly required me to take my first RMD by April 1st of 2023.
If you were born in 1950 or earlier, your RMDs (including one for 2022) must continue. If you were born from 1951 through 1959, your RMDs are triggered when you turn 73. And, if you were born in 1960 or later, your RMDs start when you reach 75.
SECURE 2.0 also introduced a change to the penalty for failing to take an RMD. Gone is the onerous 50% penalty, replaced with a lesser 25% one. In addition, if the missed RMD is corrected by promptly taking it, the penalty goes down to a more reasonable 10%. Some financial writers speculate that this change will actually generate more revenue for the government. They point to the fact that the 50% penalty was so severe that the IRS frequently waived it if it were promptly corrected and there was a valid explanation for the oversight. These writers speculate that the lower penalties will be less likely to be waived. Interesting.
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