Your RMD Deadline Is Closer Than You Think -- Miss It and Pay Dearly

You're roughly 15 weeks away from Dec. 31, the annual deadline for required minimum distributions (RMDs). While some may look forward to making their annual withdrawal, RMD deadlines are among the most unforgiving dates on the retirement calendar.

Whether you're new to RMDs or practically a pro, here's a reminder of what's expected of you and the cost of not hitting the deadline.

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What RMDs are and when they begin

RMDs are mandatory withdrawals from tax-deferred retirement accounts, such as traditional IRAs and most employer-sponsored plans. They're designed to ensure the government collects income tax on money that has grown tax-deferred.

Under current law, many retirees must begin taking RMDs the year they turn 73. Those born in 1960 or later have until age 75 to begin withdrawing funds and paying taxes on that money. That's key here: Failure to take an RMD, or even taking too little, means not paying taxes on that money. That's a subject the federal government takes quite seriously -- so seriously, in fact, that you'll be penalized 25% of each dollar you fail to withdraw.

Let's say after decades of working and saving, you have money in three accounts: A traditional IRA, a 401(k), and a profit-sharing plan. You're required to calculate individual RMDs on each account separately, but one year after a particularly busy holiday season, you forget to include the profit-sharing plan in your calculations. Say the amount you should have taken from the profit-sharing plan was $4,000. Failure to withdraw that amount could land you a $1,000 penalty.

A recent softening

In 2022, the SECURE 2.0 Act reduced the penalty from an eye-popping 50% down to 25%. If you miss a withdrawal but correct it within two years, the penalty can drop to 10%. Correcting the issue generally involves withdrawing the missed distribution (or a portion of it) and filing IRS Form 5329 to report the error.

However, even with this softening, the combination of penalty and ordinary income tax makes missing a deadline financially painful.

Why the deadline is easy to miss

On the surface, a Dec. 31 deadline sounds straightforward, but several issues can get in the way:

• The holiday season: If you're particularly busy from October through January each year, it may be easy to miss the deadline.
• Your first withdrawal: If you were allowed to delay your first RMD to April 1 of the year you turned 73, you may forget that you owe two RMDs that year, with the second due by Dec. 31.
• Multiple RMD obligations: As mentioned, retirees who own multiple accounts must meet RMD requirements on each account separately, which can cause one account to fall through the cracks.

Practical steps to stay ahead

Several practical habits can prevent an RMD deadline from becoming a costly mistake:

• Know when your first RMD is due under current SECURE 2.0 Act rules.
• Set calendar reminders for Dec. 31.
• Work with a plan administrator or financial advisor to calculate the correct RMD for each account.
• Once you know the RMD for each account, set up automatic withdrawals.
• If you choose to delay your first RMD to April 1, plan for two distributions in that calendar year.

The RMD deadline is not just another date on the calendar. It's a deep line in the sand backed by substantial penalties.

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