Missing Your RMD? Discover the Costly Consequences in Retirement!

That’s right! You have only a few days left to take action before the December 31 deadline. If you don’t, you might find yourself facing a hefty penalty—something nobody wants during tax season. So, what’s this all about? If you’re 73 or older, you must withdraw a minimum amount from your retirement account to stay on good terms with the IRS.

But what happens if you miss that deadline? Spoiler alert: The IRS will come knocking! And trust us, you don’t want to pay those fines. Let’s dive into what you need to know.

Understanding Required Minimum Distributions (RMDs)

If you’re the proud owner of an individual retirement account and turned 73 before 2024, this isn’t your first rodeo. However, even seasoned pros could use a little refresher. After all, knowledge is power when it comes to your hard-earned retirement savings!

Here’s the deal: When you hit 73, the IRS requires you to start withdrawing a minimum amount from your IRAs every year. And yes, this starts in the calendar year you turn 73!

So, how much are we talking about? The first year, you’ll need to withdraw about 4% of your account balance from the previous December 31. After that, the percentage increases a bit each year. However, keep in mind that your required withdrawal might actually decrease if the account value isn’t growing as expected. The IRS has its eye on ensuring your account will be empty by the time you turn 120—though let’s be real, few of us will hit that mark precisely!

Your brokerage will provide you with a specific RMD amount on tax Form 5498 based on your account’s last year-end balance. And remember, while there’s a required minimum distribution, there’s no cap on how much you can take out. Just be aware that larger withdrawals can bump you into a higher tax bracket since these distributions are taxable income.

But don’t stress—there are exceptions. For starters, your first RMD isn’t due until April 1 of the year after you turn 73. After that, every December 31 is your deadline. Also, if you have a non-inherited Roth IRA, you’re off the hook for RMDs since the taxes have already been paid. And if you’re still contributing to a 401(k) or similar plan while working, those accounts might not require withdrawals until you stop working.

The Consequences of Ignoring RMDs

Now, let’s talk about what happens if you don’t comply with the RMD rules. Spoiler alert: It’s not pretty. Failing to take your required distribution by the deadline means the IRS won’t let you off easy. They’ll impose a penalty on the amount you should have withdrawn—25% of the shortfall, to be precise. Yikes!

But don’t panic just yet! If you correct the mistake within two years, that penalty drops to a more manageable 10%. And if you can convince the IRS that your missed RMD was a reasonable error, you might just get away without any penalties—though this isn’t a guarantee and requires filing Form 5329 with your tax return.

And remember, if you’ve got multiple IRAs, you don’t have to take the required amount from each one. Just make sure that the total across all your accounts meets the required distribution. The IRS only cares about the combined total!

So, how does the IRS keep tabs on your RMDs? Each year, your broker reports your account details to the tax authorities. You might dodge their radar for a bit, but trust us—they’ll catch up with you eventually. It’s far smarter to be proactive about your RMDs than to risk the scrutiny of the IRS!

With the clock winding down, if you need to take a required minimum distribution for 2024, now is the time to spring into action. Reach out to your IRA provider ASAP to ensure everything is squared away before the December 31 deadline hits!