Elm3’s Guide to Required Minimum Distributions (RMDs)

Many of us contribute to IRAs, 401(k)s, or other tax-deferred retirement accounts. These accounts allow investors to contribute tax deductible dollars that will then grow tax-free, until withdrawals are taxed in retirement. To ensure that taxes are eventually paid on these funds, the IRS requires holders of tax-deferred accounts to take Required Minimum Distributions (RMDs) after turning 72.

What is the deadline?

If you are older than 72, you have until December 31st to take your RMDs from your tax-deferred accounts. Missing this deadline could be costly. The IRS can impose a 50% penalty on undistributed RMD amounts.

Those who turned 72 in 2022 have until April 1, 2023 to take their first RMD. Keep in mind that doing so would require you to take two RMDs in 2023. Since RMDs are taxable, you should consider the tax implications of taking your RMD in 2023 versus in 2022.

If you are still working, you can likely delay taking your RMD from your current employer’s 401(k) until April 1 of the year after you retire.

How much is my RMD?

Your RMD is calculated by dividing your account balance at the end of 2021 by a life expectancy factor determined by the IRS. Most IRA and 401(k) account custodians will tell you the size of your RMD for that year.

The RMD for each IRA, 401(k), or other tax-deferred account will be determined separately. However, owners of multiple IRAs can total their IRA RMDs and take the total RMD from one or multiple accounts. Owners of multiple 401(k)s cannot total their RMDs or determine from which account the RMDs are withdrawn.

Can you avoid the 50% penalty?

You may be able to request a waiver of the penalty even if you fail to take your whole RMD in a given year. This waiver may be granted if you made a reasonable error and took necessary steps to increase your distribution. You must complete and submit Form 5329 to explain the error as well as the steps you’re taking to resolve the issue.