Attention retirees! The IRS has issued a reminder for those who are 73 years old or older that it is time to make the Required Minimum Distributions (RMD) before next December 31st. This, which seems like a very confusing procedure, is mandatory to do, because, if you do not do it… you could incur fines of up to 50%. So, in this article we are going to give you all the tips so that this does not happen to you, from how to calculate them to what steps to follow to avoid these penalties, make sure you are prepared to avoid this fine.
What are Required Minimum Distributions (RMD)?
Let’s go step by step, RMDs are the minimum amounts that retirement account owners must withdraw annually once they reach a certain age. In other words, what the RMD ensures is that these funds are presented to the Treasury and do not remain “forgotten” indefinitely in the accounts of these people. By the end of this year, 2024, this requirement must be carried out by people who have turned 73 years old. These withdrawals must be made before December 31 (unless it is your first year, in which case you are allowed the first withdrawal until April 1, but you will have to withdraw that and the one on December 31, 2025)
How do I calculate my RMD?
It’s very easy, you’ll have to take the data from your account balance at the end of the previous year, your age, and the life expectancy table.
Let’s give you an example to make it easier to understand:
If at the end of last year, you had $100,000 in your account, that will be the balance you will use for the calculation. Now let’s suppose that you are 73 years old, so, according to the IRS table, the divisor should be 25.9, so the account would be: 100,000/25.9=3,861.00 which will be what you need to withdraw this year.
How do RMDs work and who do they apply to?
Well, they are mandatory for people who have the following retirement accounts: Traditional IRA, SEP IRA, SIMPLE IRA or 401 (k) Plans.
Be careful, because this amount that the RMD gives you is considered income and is subject to taxes, so you must include it in your annual tax return.
What are the fines and penalties for non-compliance?
Strict penalties are expected for those who fail to comply with their RMD:
- The standard penalty is 25% of the amount not withdrawn.
- In more serious (or repeated) cases, the penalty will be 50% of the amount not withdrawn.
A complicated payment for some people
Rita Assaf, vice president of retirement products at Fidelity Investments, explained that the reason why some people do not comply with this requirement is probably because there is confusion caused by having more than one retirement account with different providers, which makes it difficult for many to comply with the exact payment dates and, above all, with the amounts. A study by this company revealed that up to 48% of users had not yet withdrawn any amount, and this is what causes these exorbitant fines.
Tools that can help you with this process:
First of all, if you have questions about the RMD, it is essential that you contact the IRS, and luckily they offer direct assistance through their website or by calling 1-800-829-1040, or by reading IRS publication 590-B.
On the other hand, if you understand everything and what you find difficult is doing the calculation, there are several online calculators that will help you with the calculation, such as the Schwab website (click here and it will take you directly)
So, you no longer have an excuse, do this process before you are fined, since this is not the time to receive these types of gifts.