Retirees Who Blow This Tax Deadline Risk a Big, Fat Penalty

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Many retirees who turned 72 prior to July 1, 2021, are up against a potentially costly tax deadline.

Folks that age who own certain types of retirement accounts generally must withdraw what the IRS calls a “required minimum distribution,” or RMD, by Dec. 31. If they miss this deadline, they face a whopping 50% tax penalty — which could translate to hundreds or thousands of dollars.

RMDs are a minimum amount of money that the IRS requires you to withdraw from most types of retirement accounts each year, generally starting the year in which you turn 72.

Exceptions include:

  • If you turned 70½ on or before Dec. 31, 2019, your RMDs likely started the year in which you turned 70½.
  • If you have a workplace retirement plan that requires it, your RMDs might start the year in which you retire.

The types of retirement accounts to which RMDs apply include:

  • Traditional individual retirement account (IRA)
  • Simplified employee pension (SEP) IRA
  • Savings incentive match plan for employees (SIMPLE) IRA
  • Traditional 401(k)
  • Roth 401(k)
  • 403(b)
  • 457(b)

Roth IRAs are not subject to RMDs during the original account owner’s lifetime, as we note in “7 Secret Perks of Individual Retirement Accounts.”

RMD deadlines for 2021

A federal law known as the Setting Every Community Up for Retirement Enhancement Act, or Secure Act, of 2019, changed the RMD age for most people from 70½ to 72. Specifically, it changed the RMD age to 72 for everyone turning 70½ after Dec. 31, 2019.

Due to this change — along with the fact that another federal law, the Coronavirus Aid, Relief, and Economic Security (CARES) Act of 2020, made RMDs optional for 2020 — RMD deadlines for 2021 are a little different than usual.

Ed Slott & Co., which specializes in educating financial professionals and savers about the intricacies of IRAs, explains this more succinctly than the IRS:

  • People who turned 72 prior to July 1, 2021, must withdraw their RMD for 2021 by Dec. 31, 2021.
  • People who turned or will turn 72 during the last six months of 2021 have until April 1, 2022, to withdraw their RMD for 2021.

If you fail to withdraw an RMD in full by any applicable deadline, the IRS could penalize you. The amount of this penalty is equal to 50% of whatever RMD amount you failed to withdraw on time. That could easily amount to four figures.

RMD deadlines for future years

By 2022, the transition to the Secure Act will be complete, meaning everyone who reaches age 72 in 2022 or thereafter will be covered by the Secure Act. As Sarah Brenner, the director of retirement education at Ed Slott & Co., puts it:

“The dreaded ½ year RMD confusion that has tormented seniors for decades will come to an end.”

Specifically, the RMD deadlines for 2022 and beyond will be as follows:

  • Initial RMD: April 1 of the year after you turn 72
  • All subsequent RMDs: Dec. 31

The IRS gives you a little more time to withdraw that very first RMD — until April 1 of the year following the year that you turn 72.

Just beware that if you postpone withdrawing your initial RMD until the following calendar year, you would end up having to withdraw two RMDs in that calendar year: your first RMD by April 1 and your second RMD by Dec. 31.

As a result, you’d likely owe taxes on both of those RMDs in the same year, as RMDs are generally taxable income. And that could hike your tax bill for that year.

Fortunately, you can avoid that potential spike in your taxes by not postponing that very first RMD. For example, if your initial RMD is for 2022, withdraw it during 2022 rather than early 2023. That way, you won’t have to withdraw both your first and second RMDs in 2023.

RMD amounts

The exact amount of an RMD depends on your life expectancy and retirement account balance. The IRS offers RMD worksheets to help you determine your RMD amount.

The federal agency also warns that taxpayers themselves are ultimately responsible for getting their RMDs right:

“Although the IRA custodian or retirement plan administrator may calculate the RMD, the IRA or retirement plan account owner is ultimately responsible for calculating the amount of the RMD.”