What’s an RMD?
When you have an account balance (or an accrued benefit) in a qualified retirement plan, in most cases that money was contributed on a pre-tax basis. If the account came from your own salary deferrals, you did not pay tax on that portion of your salary. If the account came from company contributions, the company took a tax deduction for those contributions (we are ignoring Roth contributions and tax-exempt employers for the sake of this discussion).
The IRS eventually wants to collect taxes on that money. Generally, when you take a distribution from a qualified plan, that’s when you pay the taxes. But the IRS doesn’t want to wait forever for that to happen. So they have rules that say starting when you reach a certain age, you have to take a distribution from the plan each year and include it in your taxable income. That’s called a Required Minimum Distribution, or RMD.
When do RMDs Start?
The SECURE Act that was passed in 2019 and SECURE 2.0 that was passed in 2022 changed the ages that your RMD must begin as follows:
If you were born..........RMDs start at
Before 7/1/1949............Age 70½ (you should be receiving RMDs already)
7/1/1949 - 12/31/1950...Age 72 (you should have received one or two RMDs already)
1951 - 1958...................Age 73
1959..............................Either age 73 or 75; we are waiting for IRS to clarify the rules.
1960 or later..................Age 75
If you are not a more than 5% owner of the employer (or certain relatives of one), then you don’t have to begin taking RMDs until the year you retire, if that’s later. Also, your very first RMD can be delayed until April 1st of the following year, but all future RMDs must be made by December 31 each year.
This is assuming that you are alive to receive your RMD—there is a whole set of other rules governing when RMDs must begin to be paid to a beneficiary after a participant’s death.
What happens if I miss an RMD?
Don’t let this happen! The penalties for missing an RMD (or not taking enough) are serious!
Before SECURE 2.0, the penalty for missing an RMD (or not taking enough) was a draconian 50% excise tax on the missed RMD. If you had a good excuse for missing your payment, you could apply to the IRS to waive all or a portion of the penalty, but there was no guarantee that the IRS would agree to waive it.
Under SECURE 2.0, the penalty was reduced from 50% to 25%. And if the mistake is corrected within 2 years, the penalty is further reduced to 10%. You can still apply to the IRS to waive the penalty.
If you do miss an RMD, the first thing to do is to withdraw the undistributed amount. The recipient should report this as taxable income in the year the actual distribution has occurred, regardless of when the distribution should have been made.
IRS Form 5329 is used to report missed RMDs, and is also used to request a waiver of the excise tax. To request a waiver, a statement should be attached to the form. IRS instructions don’t provide specific guidance on what should be included on the statement. However, the following should be included at a minimum:
An explanation of why the RMD was missed
The date on which this missed RMD was first noticed
The date on which the distribution was taken, and a statement that it was taken as soon as possible after it was noticed.
The excise tax on the amount requested to be waived does not have to be paid until after the IRS makes a decision on the waiver.