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Didn’t the Rules Change on IRA RMDs?

If you’re familiar with retirement at all, you’re probably aware of IRAs. Traditional IRAs are a common mainstay for retirees, thanks to their tax benefits and growth potential. However, once you retire, you need to take money out every year, called a required minimum distribution (RMD). 

The rules surrounding RMDs have changed in recent years, so we wanted to take a closer look at what that means for retirees and those who are close to retirement.

Here’s what you need to know.

What is an RMD?

The main appeal of a traditional IRA is tax deferment. When you contribute funds to the account, you may be able to claim that money as a deduction on your taxes. So, rather than pay taxes on it up front, you can pay them later when you finally withdraw it.

Because of this benefit, the IRS still wants that tax revenue.

So, once you reach a specific age (more on that next), you have to withdraw funds from your IRA and pay taxes. If you don’t take the distribution, you have to pay a steep penalty instead. 

What are the Rules for RMDs? 

The Setting Every Community Up for Retirement Enhancement Act (SECURE Act) was passed in 2019 and became law on December 20th of that year. This act raised the age requirement for RMDs. 

Before the act, account holders had to take their first distribution once they reached 70 1/2. With the change, that age is now 72. Those who turned 70 1/2 after the bill became law can now wait until 72 to take their RMDs. 

The amount of these distributions depends on complicated tax tables used by the IRS. In the first year, account holders have to withdraw money by April 1st. So, if you turn 72 in 2022, you need to take funds out by April 1st of 2023. The deadline is December 31st for every year after. 

If you don’t take an RMD, the penalty is 50 percent of the funds you would have withdrawn. Considering that your tax bracket will likely be less than half of that, you don’t want to pay the penalty. 

Planning for retirement is one of the most crucial things you can do. Regardless of your age, it’s never too early to make a plan. If you need any help planning for your golden years, feel free to reach out to us today!

Written by Matthew Delaney


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