By Saturday, folks who turned 72 in 2022 must start drawing down their retirement accounts to avoid a steep tax penalty.
Required minimum distributions, aka RMDs, are mandatory withdrawal requirements that apply to all employer-sponsored retirement accounts, such as 401(k)s and 403(b)s. Typically, RMDs are required by the end of each year, but for your first RMD, you have the option to delay the withdrawal until April 1.
If you miss this RMD deadline, your late withdrawal is subject to excise tax penalties, according to the IRS. The agency also says that these withdrawal rules apply to most individual retirement accounts (IRAs) too — but not Roth IRAs.
What it means for you
If you turned 72 in 2022, you must take your first RMD from most types of retirement accounts by April 1, or face a major tax penalty on your late withdrawal.
- According to the IRS, late withdrawals are subject to an excise tax of up to 25%.
- Before the Secure Act 2.0 — a new law that overhauled many retirement provisions — the late RMD penalty was 50%. The new legislation also offers a way for you to reduce that penalty to 10% if the missed withdrawal is corrected within two years using IRS form 5329.
- However, the sprawling legislation is causing some confusion this year because it raised the RMD age to 73. As the changes roll out, the IRS clarifies that if you reach age 72 in 2023, your first RMD is due April 1, 2025. But if you reached 72 last year, your RMD deadline is Saturday.
- The exact amount of your RMD depends on several factors, including the type(s) of retirement accounts you may have and your personal financial situation.
By withdrawing only the bare minimum from your retirement accounts, you can hang on to more of your retirement savings for longer. However, experts note that most folks need more than that to make ends meet in retirement.
"Most retirees already withdraw at least their required distribution amounts to pay for normal living costs," Howard Gleckman, a senior fellow at the Urban-Brookings Tax Policy Center, wrote. "The big beneficiaries of delaying RMDs are the wealthy who do not need retirement savings to pay expenses or their heirs."