Failing to Comply with the Mandatory Minimum Distributions (MMDs) in Retirement Consequences
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Heads Up, Seniors! RMD Deadlines and Consequences
As we approach 2024, most retirees have crossed the deadline for their required minimum distributions (RMDs). However, if you turned 73 last year, don't freak out—you still have until April 1, 2025, to make your first RMD. Once you've grappled with these mandates for a couple of years, they become less daunting.
However, beware of the consequences of neglecting your RMDs. Failure to comply with IRS requirements triggers a 25% penalty on the amount you should have withdrawn. For instance, if you were supposed to take a $10,000 withdrawal from your IRA in 2024 and skipped it entirely, you'll face a whopping $2,500 penalty. Ouch!
Luckily, there are ways to mitigate the damage or, in some cases, even dodge penalties altogether. Familiarize yourself with the rules and avoid skipping your RMDs altogether.
Skipping Your RMD: The IRS is Not Your BFF
The primary reason for RMDs is that the government allows tax-advantaged retirement accounts as incentives for investing in retirement. But eventually, it wants its taxes. RMDs help the IRS collect taxes gradually, as you'll inevitably be taxed on the distribution.
The only exemptions to this rule are workplace retirement plans if you're still working for the company and own less than 5% of it. Roth retirement plans are also exempt, as contributions to these accounts are taxed when made and withdrawals in retirement are tax-free.
Consequences of Ignoring the IRS
When you miss the RMD deadline, the IRS imposes a 25% penalty on the amount you should have withdrawn. But there's a slim chance to bring those penalties down to 10%. You must withdraw the missed RMD ASAP, file an amended tax return with the IRS, and explain the oversight. If the IRS deems your error reasonable, they may reduce the penalty.
Don't Blink and Miss Your RMDs in the Future
Calculate your RMDs using your account balances and the required distribution period, which can be found in the Uniform Lifetime Table. You must calculate the RMD for each tax-deferred retirement account individually and withdraw the required amount from each.
If you've already made early tax-deferred retirement account withdrawals for the year, double-check that you've met your RMD requirements. If not, take action to avoid penalties.
An Alternative to RMDs: Qualified Charitable Distributions
A stellar alternative to RMDs are qualified charitable distributions (QCDs). Directly transfer your RMD to a qualifying charity from your retirement account without touching the funds. The government won't consider this income for the year, thereby reducing your tax liability. And voilà, you get to do some good in the world.
Nail Your RMDs and Pay the IRS Less
By understanding and following the IRS regulations, you can securely navigate RMDs and minimize the possibility of penalties. Seek help from a financial advisor to create an individualized withdrawal strategy, ensuring you sail smoothly through retirement years.
- For seniors turning 73 in 2023, the deadline for their first required minimum distribution (RMD) is extended until April 1, 2025.
- Neglecting mandatory RMDs can lead to significant financial consequences, such as a 25% penalty on the amount you should have withdrawn, as seen in a $10,000 RMD skip in 2024 resulting in a $2,500 penalty.
- To reduce penalties, Senior citizens should familiarize themselves with RMD guidelines, promptly withdraw missed distributions, and file an amended tax return with the IRS, explaining the oversight.
- In 2025, many retirees will need to reconsider their financial strategies as they are expected to face a retirement income shortfall due to RMDs and other expenses.
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