Individuals who are 73 or older in 2023 and own a traditional individual retirement account (IRA) or another type of retirement account—such as SEP IRAs, SIMPLE IRAs, and 401(k) or 403(b) accounts— are required to take a required minimum distribution (RMD) each year.
If the account holder fails to withdraw the RMD during the annual timeframe, there can be a penalty. For every dollar not withdrawn, the Internal Revenue Service (IRS) will charge a 25% penalty, known as the excise tax. However, If the failure is corrected promptly, the penalty is reduced from 25% to 10%.
- Owners of a tax-deferred individual retirement account (IRA) or another type of retirement account must take required minimum distributions (RMDs) beginning at age 73 to avoid a penalty tax.
- If a withdrawal is missed, then the account owner must pay the penalty or submit a waiver request.
- Those who inherited a retirement account from an owner who died before beginning RMDs can avoid the penalty by withdrawing the full balance of the account by Dec. 31 of the fifth year following the year of the owner’s death.
Click Play to Learn About Required Minimum Distributions (RMDs)
Step 1: Pay the Excise Tax
The IRS website offers instructions for calculating the excise tax owed for failing to take an RMD. The excise tax owed must be reported on IRS Form 5329 and IRS Form 1040, your income tax return.
If you are not required to file your taxes with IRS Form 1040, you must file Form 5329 by itself and pay the excise tax owed.
Complete the form with the requested information, and enclose your check or money order made payable to the United States Treasury. On the check or money order, write your Social Security number, the current tax year, and “Form 5329.”
Step 2: Request a Waiver
If you feel that you missed the deadline due to a reasonable cause, then you may ask the IRS to waive the 25% excise tax. The request for a waiver may be included in a letter of explanation, which you attach to your tax return Form 1040 or along with your Form 5329.
When requesting a waiver, do not pay the excess accumulation penalty up front. Instead, follow the instructions for requesting a waiver in the Instructions for Form 5329. If the IRS does not honor your waiver request, then you will be notified.
Step 3: Withdraw the Full Balance
In some cases, if you are a beneficiary who inherited a retirement account from an owner who died before their required beginning date (RBD), then you must begin withdrawing RMD amounts by a certain time. That deadline is Dec. 31 of the year following the year when the owner of the retirement account died. You must also withdraw an RMD amount by Dec. 31 of each subsequent year.
Under provisions of the SECURE Act of 2019, this scenario has gotten much less common; however, it may still apply to spousal beneficiaries, beneficiaries less than 10 years younger than the deceased, or those who inherited an account before Dec. 31, 2010.
The SECURE 2.0 Act of 2022, part of the Consolidated Appropriations Act (CAA) of 2023, builds on and expands the SECURE Act of 2019 and affects the RMD rules for retirement accounts.
While the excise penalty will generally apply if you did not withdraw the RMD amount on time, the penalty may be waived if you switch to the five-year rule and withdraw the full balance of the account by Dec. 31 of the fifth year following the year when the retirement account owner died.
Let’s look at the following example:
In 2018, John, age 63, inherited an IRA from his brother Ron, who died at age 65. Since Ron died before his RBD, John has two options for distributing the IRA balance:
- John can distribute the assets over his single life expectancy. For most IRA plan documents, this is the default option and is consistent with the provisions of RMD regulations.
- John can distribute the assets by Dec. 31 of the fifth year following the year when Ron died.
John chooses the life-expectancy option. The RMD for 2019 is $10,000, but John fails to withdraw any amount by Dec. 31, 2019. If John wants to continue using the life-expectancy method, then he will have to pay the IRS an excise tax of $2,500 and must file Form 5329.
He may request a waiver if he feels the failure is due to a reasonable cause. However, John will receive an automatic waiver of the penalty if he withdraws the account balance by Dec. 31, 2023, the fifth RMD year following the year when Ron died.
How Is a Required Minimum Distribution Calculated?
The annual RMD is determined by dividing the retirement account’s prior year-end fair market value by a life expectancy factor published by the IRS.
Can an Account Holder Withdraw More Than the RMD?
Account holders can and often do take more than the RMD each year, commonly during retirement.
Can an Account Owner Just Take a RMD From One Account Instead of Separately From Each Account?
An IRA owner must calculate the RMD separately for each IRA but can withdraw the total amount from one or more of the IRAs. Similarly, a 403(b) contract owner must calculate the RMD separately for each 403(b) contract but can take the total amount from one or more of the 403(b) accounts. However, RMDs required from other types of retirement plans, such as 401(k) and 457(b) plans have to be taken separately from each of those accounts.
The Bottom Line
Missing your RMD deadline can be frustrating as well as costly. To ensure it does not happen, take the necessary steps to make sure your distribution occurs by the applicable deadline. This includes making arrangements with your custodian for systematic or automatic withdrawals to occur on a predetermined date. Submit your withdrawal requests at least two months before the deadline, and check your statements to ensure that the correct amount was distributed from your account.