Global Daily Tax News, US IRS Highlights Deadline For Minimum Pension Withdrawals, (Dec 16, 2024)

The US Internal Revenue Service has issued a reminder to retirees aged 73 or older of the deadline to take required minimum distributions from individual retirement arrangements (IRAs) and other retirement plans. It also highlighted updates introduced by the SECURE 2.0 Act.

Required minimum distributions (RMDs) are amounts that many retirement plan and IRA account owners must withdraw annually. These withdrawals are considered taxable income and may incur penalties if not taken on time. The IRS has prepared FAQs with detailed information regarding the new provisions in the law.

The SECURE 2.0 Act, enacted on December 29, 2022, raised the age that account owners must begin taking RMDs, while eliminating RMDs for Designated Roth accounts in 401(k) and 403(b) retirement plans.

The minimum distribution rules generally apply to original account holders and their beneficiaries in these types of plans:

• IRAs: IRA withdrawals from traditional IRAs and IRA-based plans occur every year once people reach age 73, even if they're still employed;

• Retirement plans: The RMD rules apply to employer-sponsored plans, with delays allowed until retirement unless the participants own more than five percent of the sponsoring business;

• Roth IRAs: Roth IRA owners are not required to take withdrawals during their lifetime. However, beneficiaries are subject to the RMD rules after the account owner's death.

Designated Roth accounts in a 401(k) or 403(b) plan will not be subject to the RMD rules while the account owner is still alive for 2024. The IRS has prepared an RMD comparison chart, which outlines key RMD rules for IRAs and defined contribution plans.

If an account owner fails to withdraw the full amount of the RMD by the due date, the owner is subject to a 25 percent excise tax on the amount not withdrawn. The 25 percent excise tax rate is reduced to 10 percent if the error is corrected within two years.

IRA trustees or plan administrators must either report the RMD amount to the account owner or offer to calculate it. Each IRA plan's RMD must be calculated separately. However, owners can withdraw the total required amount from one or more accounts of their choice as long as the annual requirement is met.

While an IRA trustee or plan administrator may calculate the RMD, the account owner is ultimately responsible for ensuring the correct RMD is taken. The IRS has released guidance on calculating minimum RMDs.

Account owners should file Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts, with their federal tax return for the year the full amount of the RMD was required but not taken.

Beneficiaries of inherited IRAs, retirement plan accounts, or Roth IRAs may be required to take RMDs. For guidance on taking RMDs from an inherited account and reporting taxable distributions as part of gross income, taxpayers should refer to Retirement topics - Beneficiary and Required minimum distributions for IRA beneficiaries, the IRS said.

Finally, the IRS drew attention to Publication 559, which provides guidance for those responsible for an estate and required to complete and file income tax returns.