The notion that financial obligations during retirement are less stringent than when working is often disputed. In reality, the IRS has strict rules regarding tax-advantaged accounts meant to sustain retirees through RMDs. These mandatory payments can significantly impact an individual’s taxes and inheritance.
The most critical rule concerns RMDs, which require those with tax-deferred accounts to make regular distributions to pay their tax obligations. The IRS aims to prevent taxpayers from passing on untaxed income to heirs by ensuring these payments are made. Retirees have the option to withdraw funds at retirement, but if they choose not to, the IRS dictates that they must take the first payment by December 31 of the year they turn 73.
For those who delayed their first RMD until April 2025, this means taking a second distribution by December 31, 2025. These payments will be taxable in 2025 and reported on the 2025 tax return. It is essential to note that this count towards your total income for the year, potentially affecting your tax bracket.
Not all retirement accounts are subject to RMDs. Simplified Employee Pension (SEP) and Savings Incentive Match Plan for Employees (SIMPLE) IRAs apply during the account owner’s lifetime, while participants in 401(k), 403(b), and 457(b) plans must follow these rules. Roth IRAs, however, are exempt from RMDs due to their post-tax income structure.
Workplace plan participants may qualify for deferrals on RMDs if they continue working. Employees of public schools and certain tax-exempt organizations with pre-1987 403(b) plan accruals must confirm their plan details with their employer or plan administrator.
To avoid penalties, it is recommended to consult the IRS or a certified advisor for guidance on your specific plan.
Source: https://www.lagradaonline.com/en-us/rmds-due-and-the-irs-is-reminding-you