US retirees who are turning 72 years old are required to adhere to the Rule of Required Minimum Distribution (RMD) by April 1 to escape penalties from the Internal Revenue Service (IRS). The rule ensures that retirees take a minimum amount out of their retirement plans each year. If they fail to do so, they will attract a 25% penalty from the IRS.
What is the RMD Rule?
The law also covers Individual Retirement Accounts (IRAs). If the primary account owner dies before attaining the RMD age, their beneficiary must meet the withdrawal obligation in their stead. The law covers tax-deferred retirement plans such as traditional IRAs and retirement accounts sponsored by employers. Such people who are not sure about their requirements should consult a finance adviser or attorney.
To find the necessary withdrawal, the IRS computes RMDs based on a formula that takes the retirement account balance on December 31 of last year and divides it by life expectancy. The compliance is the responsibility of the taxpayer.
Penalties and Reductions
If a person is unable to withdraw the sum, he or she incurs a 25% penalty. Still, in case the payment is made within 24 months and the Form 5329 is submitted, the penalty can be lowered to 10%.
Financial advisors tend to advise drawing the first RMD by December 31 in the year someone reaches age 73. It prevents two RMDs being drawn in a single year, lowering the taxable income, according to Marca.
