Important RMD deadline is almost here
April 1 is just around the corner (and so is April 18, this year’s tax filing date for most people — see tinyurl.com/4dkhksaa for more details). Time flies — it seems like we were just celebrating the new year.
April 1 is important — very important — for retirement savers who are age 72. If you are this age, what follows is for you. And if you have friends or family members this age, please give them a copy of this column.
You need to check three things:
1. Was your birthday in the second half of 1949 (July 1 through Dec. 31, 1949)?
2. Do you have an individual retirement account (IRA) or other tax-deferred retirement plan, such as a 401(k)?
3. Did you withdraw your required minimum distribution (RMD) before Dec. 31, 2021? If not, you need to withdraw your first RMD (the one for 2021) before April 1 of this year (2022).
The April 1 date is a onetime-only rule used for an owner’s first RMD. Subsequent RMDs must be withdrawn for each calendar year before Dec. 31 of that year. For example, a 73-year-old’s 2022 RMD must be withdrawn by Dec. 31, 2022; the actual amount to be withdrawn is based on Dec. 31, 2021, values.
If your memory tells you that the starting age for RMDs is 70 1⁄2, that changed to 72 as a result of the SECURE Act (the Setting Every Community Up for Retirement Enhancement Act), which became effective at the end of 2019.
To repeat: RMDs start at age 72 now, beginning with those born on July 1, 1949, or later. (Those born before that date came under preSECURE Act rules and had to begin their RMDs at the previous required age of 70 1/2.)
Here is an example of what we just discussed: Harry was born July 1, 1949, which means he turned 72 in the second half of 2021; his IRA has a Dec. 31, 2020, value of $100,000; he did not withdraw any money from his IRA in 2021. As a result, he faces a stiff penalty if he doesn’t withdraw his RMD from his IRA by April 1, 2022.
If he does withdraw his 2021 RMD by April 1, he will avoid the penalty. He will still have to take his 2022 RMD sometime before Dec. 31, 2022, based on his actual Dec. 31, 2021, balance. That means he’ll take two RMDs in 2022, paying income taxes on both. Then, in 2023, he will take one RMD (for 2023) calculated on the Dec. 31, 2022, IRA balance.
How does Harry calculate his 2021 RMD? He will have to use pre-2022 tables, which will result in a slightly higher RMD. (RMD tables were revised in 2022.)
My best advice is for Harry to contact his IRA custodian for assistance in calculating both his 2021 and 2022 RMDs. Note that the usual resource I would send you to (IRS Publication 590-B, found at tinyurl.com/2xc7cmut) will give you 2022 RMD divisors.
What happens if Harry doesn’t take his RMD by his RBD (required beginning date) of April 1, 2022? That is not a date Harry wants to miss, because if he fails to take the RMD by then, that’s where the “stiff penalty” comes in: He will face a 50% excise tax on the amount that should have been withdrawn and wasn’t. If he failed to withdraw an RMD of $20,000 on time, his penalty would be $10,000.
Again, Harry should check with his IRA custodian for help with calculations and with his tax adviser to double-check accuracy -— and quickly. April 1 will be here before he knows it.
Julie Jason, JD, LLM, a personal money manager (Jackson, Grant of Stamford) and author, welcomes your questions/comments (readers@juliejason.com). Her awards include the 2021 Clarion Award, symbolizing excellence in clear, concise communications. Her latest book, a curated collection of Julie’s columns, is “Retire Securely: Insights on Money Management From an Award-Winning Financial Columnist.” To hear Julie speak, visit juliejason.com/events.