If you’re about to turn age 72, already turned 72 recently, or just want to plan in advance for the future, this reminder is for you: When you turn 72, you must begin required minimum distributions (RMDs) from your retirement account. If you miss the deadline for taking your first RMD, you could put yourself in jeopardy regarding potential penalties. Here’s what you need to know.
Who must take RMDs? Required minimum distributions must be taken from retirement accounts (except Roth IRAs) beginning at age 72. Until that age, you can leave the money in the account and allow it to grow, if you prefer. But because the assets have been allowed to grow with taxes deferred all this time, the government does require you to begin taking withdrawals now.
When must you take your first withdrawal? When you turn 72, you must take your first RMD by April 1 of the following year. So, if you turned 72 in 2022, you must take your first withdrawal by April 1, 2023.
However, that will mean that you must take your next withdrawal during 2023, too. For some people, taking two withdrawals in one year can push them into a higher tax bracket and trigger additional income taxes that are generally undesirable. So for those individuals, it is often better to take their first RMD by December 31 of the year in which they turn 72.
Does it sometimes make sense to wait on the first RMD? If you earned significant income through some other source during the year in which you turn 72, it might make sense to delay your first RMD until Spring of the following year. It all depends upon your exact tax situation, so this is an issue to discuss in more detail with your financial planner or tax professional.
What happens if you don’t take your first RMD on time? If you don’t take your first RMD as required, the IRS can penalize you at a rate of 50 percent of the RMD you should have taken. For most people this represents a considerable penalty, so advance planning and timing your RMD correctly is advised.
For more information on taking your first required minimum distribution, call us to schedule a consultation. We can help you decide whether to take the RMD before December 31, or wait until Spring. But one thing is for sure: You don’t want to leave this matter undecided.