Taking money out of a tax-advantaged account such as an individual retirement account (IRA) isn’t always as simple as it seems. Miss a rule, and you could face penalties or an unexpected tax bill.
Required Minimum Distributions (RMDs)
Retirement savers must take their first required minimum distribution from a traditional IRA the year they turn 73; that increases to 75 in 2033 for people born in 1960 and later. The Internal Revenue Service allows you to delay that initial withdrawal until April 1 of the following calendar year.
However, delaying your first RMD into the following year is rarely a savvy tax move, according to Drew Feldman, founder and financial planner at WideFrame Wealth in Los Angeles. Two RMDs in one year could push a retiree into a higher tax bracket, increase how much of their Social Security gets taxed, trigger the 3.8% net investment income tax, or push someone into a higher threshold for the income-related monthly adjustment amount, Medicare’s income-based surcharge.
Penalty for Missed Withdrawals
Missing a required distribution can result in a significant tax bill. Traditional retirement accounts offer tax benefits while you’re saving, but the IRS eventually requires you to take money out and pay taxes on those withdrawals. If you don’t take the required amount, you could face an additional tax.
The SECURE 2.0 Act, which went into effect in 2023, lowered the missed-RMD penalty from 50% to 25%, and to 10% if the mistake is fixed in a timely fashion. According to Internal Revenue Code Section 4974(e), the correction window generally runs through the end of the second tax year after the year of the missed RMD.
Rules for Inherited Traditional IRAs
The rules for inherited IRAs changed under the SECURE Act, and some of the details weren’t entirely clear until the IRS issued final regulations in July 2024 regarding the treatment of distributions and how to correct withdrawal errors.
If you inherit a traditional IRA from someone who had already started taking RMDs, generally you must continue making yearly withdrawals from the inherited account. Miss one, and you could face a tax of up to 25% of the amount you should have withdrawn. Fix the mistake within the correction window, generally two years, and that tax drops to 10%.
Advantages of Inherited Roth IRAs
With an inherited Roth IRA, the rules become somewhat easier for heirs. Because a Roth IRA is funded with after-tax dollars, there’s no requirement for a non-spouse beneficiary to take annual distributions or a minimum withdrawal amount in the 10-year window following the original account owner’s death.
However, there’s a kicker. The account still needs to be fully emptied by the end of that 10th year. According to Marcel Miu, CFP, founder and wealth planner at Simplify Wealth Planning in Austin, Texas, the plan is usually to leave it alone for nine years and put a calendar reminder on year 10 to distribute.
Original reporting: Alexandria, VA News – WTOP News — read the source article.
