Retirees 73 and Older Face Dec. 31 RMD Deadline

Many retirement savers age 73 and older face a Dec. 31 deadline for required minimum distributions, or RMDs, from tax-deferred retirement accounts. Missing the required amount can trigger an excise tax of 25% on the shortfall, although federal law allows the rate to fall to 10% when the error is corrected within the allowed period.

The rule is a wealth-preservation issue rather than a market call. The government is requiring money to leave certain tax-deferred accounts on schedule, and the cost of missing the deadline can be much larger than an ordinary late fee.

Who generally has to take an RMD

The IRS says people generally must begin required distributions at age 73 under current law, depending on the account and the person’s circumstances. Traditional IRAs and many employer retirement plans are subject to RMD rules, while Roth IRA treatment is different for the original owner.

The amount is calculated from the prior year-end account balance and a life-expectancy factor. Because the calculation is individualized, retirees should rely on their plan administrator, custodian or tax professional for the amount that applies to them rather than a generic dollar estimate.

Why Dec. 31 matters

After the first required year, the IRS generally requires each year’s distribution by Dec. 31. Someone taking a first RMD may have a different first-year timing option, but delaying the first distribution can result in two taxable RMDs landing in the same calendar year.

That timing can matter because RMDs are generally included in taxable income. The deadline therefore affects both compliance and the way retirement income shows up on a tax return.

The penalty is designed to make the rule hard to ignore

The IRS says a missed or insufficient RMD may be subject to a 25% excise tax on the amount that should have been withdrawn. If the shortfall is corrected within the applicable correction window, that rate can be reduced to 10%.

For retirees focused on preserving capital, the practical lesson is not to chase a new investment idea. It is to avoid losing money to a preventable distribution error. The closer Dec. 31 gets, the more important it becomes to confirm that the required amount has actually left the account.

References: Retirement topics - Required minimum distributions (RMDs)