Optima Tax Relief Reminds Retirees to Take RMDs

As retirement approaches, many individuals look forward to the financial freedom it offers.

00:16 27 March 2025

As retirement approaches, many individuals look forward to the financial freedom it offers. However, retirees must also be mindful of their obligations to the IRS, particularly when it comes to Required Minimum Distributions (RMDs). The IRS mandates that individuals begin withdrawing from certain retirement accounts once they reach a specific age. Missing these withdrawals can result in significant penalties, so it is crucial to stay on top of RMD requirements. Optima Tax Relief reminds retirees to take their RMDs and how to avoid costly mistakes. 

What Are Required Minimum Distributions (RMDs)? 

An RMD is the minimum amount that must be withdrawn annually from tax-deferred retirement accounts once a retiree reaches a certain age. These accounts typically include: 

• Traditional IRAs

• 401(k)s, including 403(b)s and 457(b)s

• Other qualified retirement plans
  
  

RMDs are designed to ensure that retirees eventually pay taxes on their tax-deferred savings. Contributions to traditional IRAs and 401(k)s are made with pre-tax dollars, meaning taxes are deferred until the funds are withdrawn. RMDs ensure that the IRS can tax these funds over time. 

RMDs do not apply to Roth IRAs during the account holder's lifetime, although RMDs may apply to inherited Roth IRAs depending on the beneficiary type and circumstances. 

When Should Retirees Start Taking RMDs? 

The age at which retirees must begin taking RMDs was raised by the SECURE Act in 2019. Prior to this change, the requirement began at age 70½. Under the SECURE Act, individuals who turn 72 after December 31, 2019, must begin RMDs at age 72. 

If you reached age 70½ before 2020, you must still start taking RMDs at age 70½. For those turning 72 in 2020 or later, RMDs are due by April 1 of the year after they turn 72. Subsequent RMDs must be withdrawn by December 31 each year. 

How Are RMDs Calculated? 

RMDs are based on the account balance as of December 31 of the previous year and the IRS life expectancy factor, which is found in the Uniform Lifetime Table. The life expectancy factor changes based on the retiree’s age, meaning the older the retiree, the smaller the factor, and therefore the larger the required distribution. 

For example, if the balance in your retirement account is $100,000 at the end of the year, and you are 72, the life expectancy factor is 27.4. Dividing $100,000 by 27.4 gives an RMD of approximately $3,650. 

What Happens If You Miss an RMD? 

The IRS imposes severe penalties for failing to take the required minimum distribution. If a retiree misses an RMD or withdraws too little, the penalty is 50% of the amount that should have been withdrawn. For example, if the required RMD is $3,650, and it is not withdrawn, the penalty would be $1,825. 

Retirees who miss an RMD should take corrective action immediately. While it’s possible to withdraw the missing amount, the penalty may still apply unless the IRS deems the error reasonable. In such cases, retirees can file IRS Form 5329 to request penalty relief. 

Conclusion 

Required Minimum Distributions are a key aspect of retirement planning for individuals with tax-deferred accounts. By understanding when to start taking RMDs, how they are calculated, and the penalties for missing them, retirees can avoid costly mistakes and ensure they remain compliant with IRS rules. Working with a financial advisor or tax professional can help ensure that RMDs are accurately calculated and taken on time, allowing retirees to maximize their retirement savings while fulfilling their tax obligations.