- If you turned 72 in 2022, the last chance to make your first compulsory retirement plan withdrawal is April 1 or you could face a 25% tax penalty.
- Although the annual deadline for required minimum distributions is December 31st, there is a special exception for the first year that moves the due date to April 1st.
- However, experts say it may be better to avoid delaying your first year’s RMD payments because of the potential tax consequences.
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If you turned 72 in 2022, the last chance to make the first mandatory withdrawal from your pension plan is April 1 – or you could face a hefty tax penalty.
Generally, you must begin these annual withdrawals, called required minimum distributions, or RMDs, by a certain age. Before 2020, RMDs started at age 70½, and the Secure Act of 2019 raised the starting age to 72. In 2022, Secure 2.0 raised the age to 73 years, starting in 2023.
Although the annual deadline for RMDs is December 31st, there is a special exception for the first year that moves the due date to April 1st.
Brett Koeppel, a certified financial planner and founder of Eudaimonia Wealth in Buffalo, New York, said Secure 2.0 has added to the confusion about who needs to take money out of retirement accounts and when.
Although Secure 2.0 raised the RMD starting age to 73 starting in 2023, retirees who turn 72 in 2022 still have to withdraw funds by April 1 to avoid a “very steep” penalty, Koeppel said.
RMDs apply to both pre-tax and Roth 401(k)s and other workplace plans, as well as most individual retirement accounts. There is no RMD for Roth IRAs until the death of the account owner.
The annual withdrawal amount from RMDs is usually calculated by dividing each account’s previous December 31st balance by the “distribution period” published annually by the IRS.
If you miss an RMD or don’t withdraw enough money, you’ll be charged a penalty of 25% of the amount you should have withdrawn. Secure 2.0 dropped the penalty to 25% from 50% starting in 2023, and can lower it further to 10% if you take the missing RMD during the “make-up window.”
The make-up window is typically the end of the second tax year that follows the year in which the missing RMD occurred, explained George Gagliardi, CFP and founder of Coromandel Wealth Management in Lexington, Massachusetts.
“I’ve had clients miss an RMD in the past, and I was able to fix it in those cases by taking the RMD as soon as possible,” he said, which involved filing a Form 5329 for the year of the missing RMD and said it was “reasonable.” reason” in the penalty line by writing an explanatory letter and sending both documents to the tax authority.
“In the past, the IRS was lenient on missed RMDs, but with the new reduced penalties, they may become more aggressive,” he said. “We’ll see how this goes over time.”
If you put off the first RMD until April, the second one is still due on Dec. 31, doubling your RMD income for the year, Gagliardi said.
“If it’s a small amount, it doesn’t make a big difference to their tax situation,” he said. “But if they have large taxable accounts, that double hit in one year could very well push them into another tax bracket,” leading to tax issues such as higher Medicare premiums or making it harder to deduct medical expenses.
Gagliardi said he never recommends waiting until April 1 to start a first-year RMD “unless your income and tax situation warrants it.”