IRS Warns Taxpayers About Required Year-End Withdrawals

The Internal Revenue Service (IRS) has issued a reminder to individuals who were born before 1951 to fulfill their required minimum distributions (RMDs) from their retirement accounts by the end of 2023. The IRS has also emphasized an important change to the RMD rule that will take effect this year.

RMDs are the specific amount that individuals with employer-sponsored retirement plans or IRA accounts are obligated to withdraw each year. Failure to take RMDs on time may result in penalties.

As per the old rules, RMDs are mandatory once the plan participant reaches the age of 72. However, for individuals born before 1951, they must commence taking the required minimum distributions starting in 2023, as stated by the IRS in a Dec. 20 press release. These withdrawals must be completed by Dec. 31.

Under the SECURE 2.0 Act of 2022, a change was made to the RMD withdrawal age, increasing the requirement to 73 beginning this year. Therefore, individuals born in 1951 who turn 73 next year will need to take RMDs in the 2024 tax year, with a deadline of April 1, 2025.

Those who turn 72 in 2023 are not compelled to take RMDs this year due to the Secure 2.0 Act rules taking effect. They can wait until they turn 73 in 2024 to make the withdrawals.

The IRS has stated that if an account owner fails to withdraw the full RMD amount by the due date, they will be subjected to an excise tax equivalent to 25 percent of the amount not withdrawn for 2023 and beyond. The SECURE 2.0 Act reduced the excise tax rate to 10 percent if the error is corrected within two years.

RMD requirements are applicable for beneficiaries of various retirement plans, including traditional IRAs, SEP IRAs, Simple IRAs, 401(k) plans, 403(b) plans, 457(b) plans, profit sharing plans, other defined contribution plans, and Roth IRA beneficiaries. The withdrawn amount will be included in taxable income, although some parts may be tax-free.

For IRA accounts, RMD withdrawals must commence once the individual reaches the age threshold, even if they are still employed. Roth IRA owners are not required to withdraw during their lifetime, but beneficiaries are subject to the RMD rules after the owner’s death.

Employer-sponsored retirement plans such as 401(k), 403(b), 457(b), and profit-sharing plans do not require RMD withdrawal if the individual is still employed, except for those owning at least 5 percent of the business sponsoring the plan.

The agency has also addressed the issue of RMD distributions waived in 2020 due to the COVID-19 pandemic. It stated that an account owner or beneficiary who received an RMD in 2020 had the option of returning it to their IRA or other qualified plan to avoid paying taxes on it.

Drawing a large RMD withdrawal can push an individual into a high tax bracket, potentially causing negative consequences. To prevent this, individuals can consider converting their retirement accounts to a Roth IRA, as withdrawals from a Roth IRA are tax-free.

On the other hand, withdrawing money from a retirement account and rolling it into a Roth IRA would require the payment of taxes on this amount. Therefore, individuals must carefully consider their options before making decisions regarding RMDs and their retirement accounts.


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