Take Retirement Plan Distributions by December 31

For many years, IRS rules stated that taxpayers could not keep retirement funds in their retirement accounts indefinitely. They must start taking withdrawals from their IRA, SIMPLE IRA, SEP IRA, or retirement plan account when they reach age 70 1/2. These withdrawals are known as required minimum distributions or RMDs.

However, the Setting Every Community Up for Retirement Enment (SECURE Act), enacted into law in 2019, changed the rules. As such, if your 70th birthday is July 1, 2019, or later, you do not have to take withdrawals until you reach age 72. Here’s what taxpayers should know about taking RMDs:

Special rule for first year RMDs.

Generally, taxpayers reaching age 72 after July 1, 2022, must begin taking required minimum distributions before the end of the tax year (December 31). A special rule, however, allows first-year recipients of these payments, those who reached age 72 during 2022, to wait until as late as April 1, 2023, to receive their first RMDs. The advantage of this special rule is that although payments made to these taxpayers in early 2023 (up to April 1, 2023) and can be counted toward their 2022 RMD, they are taxable in 2023.

The special April 1 deadline only applies to the RMD for the first year; for all subsequent years, the RMD must be made by December 31. For example, a taxpayer who turned 72 in 2021 and received the first RMD (for 2021) on April 1, 2022, must still receive a second RMD (for 2022) by December 31, 2022.

Figuring RMDs.

The RMD for 2022 is based on the taxpayer’s life expectancy on December 31, 2022, and their account balance on December 31, 2021. An IRA trustee must either offer to calculate it for the owner or report the amount of the RMD to the IRA owner on Form 5498.

For most taxpayers, the RMD is based on Table III (Uniform Lifetime Table) in IRS Publication 590-B. For example, for a taxpayer who turned 72 in 2021, the required distribution would be based on a life expectancy of 27.4 years. A separate table, Table II, applies to a taxpayer whose spouse is more than ten years younger and is the taxpayer’s only beneficiary. If you need assistance with this, don’t hesitate to call.

Exception to the RMD rules.

Though the RMD rules are mandatory for all owners of traditional, SEP, and SIMPLE IRAs and participants in workplace retirement plans, some people in workplace plans can wait longer to receive their RMDs. Usually, if their plan allows it, employees who are still working can wait until April 1 of the year after they retire to start receiving these distributions. There may, however, be a tax on excess accumulations. Employees of public schools and certain tax-exempt organizations with 403(b) plan accruals before 1987 should check with their employer, plan administrator, or provider to see how to treat these accruals.

Special rules for Roth and inherited IRAs.

Also of note is that Roth IRAs do not require withdrawals until after the owner’s death. There are also special rules for owners of inherited IRAs.

If you have any questions about RMDs or other tax issues, please call our office for a free consultation.