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If you turn 72 in 2022, the last chance for your first mandatory withdrawal from the retirement plan is April 1 — otherwise you could face a hefty tax penalty.
In general, these annual withdrawals, also known as required minimum distributions or RMDs, require you to start at a certain age. Prior to 2020, RMDs started at age 70½, and the Secure Act of 2019 increased the age of onset to 72. In 2022, Secure 2.0 increased the age to 73, starting in 2023.
While the annual deadline for RMDs is December 31, there is a special exception for the first year, which moves the due date to April 1.
Secure 2.0 RMD rules cause confusion
Brett Koeppel, a certified financial planner and founder of Eudaimonia Wealth in Buffalo, New York, said Secure 2.0 has contributed to the confusion over who should withdraw money from retirement accounts and when.
Although Secure 2.0 increased the starting age for RMDs to 73 starting in 2023, retirees who turned 72 in 2022 must still withdraw the money by April 1 to avoid a “very large” fine, Koeppel said.
RMDs apply to both pre-tax and Roth 401(k)s and other workplace plans, along with most individual retirement accounts. There are no RMDs for Roth IRAs until after the death of the account owner.
The amount you need to withdraw annually for RMDs is generally calculated by dividing each account’s December 31 balance by a “distribution period” published annually by the IRS.
Secure 2.0 lowered the RMD penalty
If you skip your RMD or don’t withdraw enough, there is a 25% penalty levied on the amount you should have withdrawn. Secure 2.0 reduced the penalty from 50% to 25% from 2023, with the option to further reduce it to 10% if you take your missed RMD during the “correction window”.
The correction window is usually the end of the second tax year following the year of the missed RMD, explains George Gagliardi, a CFP and founder of Coromandel Wealth Management in Lexington, Massachusetts.
“In the past I’ve had clients miss RMDs, and I was able to fix it in those cases by taking the RMD as soon as possible,” he said, filling out Form 5329 for the year of the missed RMD, among other things, with ” reasonable cause” to the penalty rule, writing an explanatory letter and mailing both documents to the IRS.
“In the past, the IRS has been lenient about missed RMDs, but with the new reduced sentences, they may become more aggressive,” he said. “We’ll see how this plays out over time.”
The downside of waiting to take your first RMD
If you delay your first RMD until April, the second is still due December 31, doubling RMD income for the year, Gagliardi said.
“If it’s a small amount, it doesn’t make much of a difference to their tax situation,” he said. “But if they have large tax-deferred bills, that double hit in one year could well push them into a different tax bracket,” resulting in tax issues like higher Medicare premiums or making it more difficult to deduct medical expenses.
Gagliardi said he never recommends waiting until April 1 to start freshman RMDs “unless your income and tax situation warrant it.”