After years of saving in an IRA or other retirement plan account, workers are used to the idea that their retirement savings should be untouched until retirement. However, at a certain point, the government requires individuals to start taking withdrawals or subject their savings to a penalty. 

Retirement Account Withdrawals and RMDs

A required minimum distribution (RMD) is the minimum amount account holders must withdraw from their retirement accounts each year. Individuals generally have to start taking withdrawals from retirement plan accounts when they reach age 72 (or 70 ½ if they turn 70 ½ by January 1, 2020). 

RMDs apply to most qualifying retirement plans, including IRA, SIMPLE IRA, SEP IRA, 401(k), 403(b), 457(b), profit-sharing plans, and other defined-contribution plans. Roth IRAs are not subject to minimum withdrawals until after the death of the owner. Retirement plan account withdrawals are included as part of the taxpayer's taxable income. 

Calculating RMDs

The Internal Revenue Service (IRS) provides RMD worksheets for calculating your minimum distributions, based on a number of factors, including: 

• IRA balance, 
• Distribution period based on age, and 
• If your spouse is the sole beneficiary and is more than 10 years younger.

For IRAs, the beginning date for the first RMD is April 1 of the year following the calendar year in which the individual turns age 72 (or 70 ½ if they turn 70 ½ by January 1, 2020). For a 401(k), and other qualifying plans, the beginning date for the first RMD is April 1 following the later of the calendar year in which:

• The individual turns age 72 (or 70 ½ if they turn 70 ½ by January 1, 2020), or
• Retires.

For subsequent RMDs, the withdrawal generally has to be by December 31. This means that the first withdrawal may be in the same tax year as the second withdrawal. However, individuals may be able to make their first withdrawal by December 31 of the year in which they reach the qualifying age instead of waiting until April 1. 

Penalties for Failing to Take the RMD

It can be costly to fail to take the necessary minimum withdrawal by the deadline. If you do not take any distributions or the distributions are not enough to qualify, the IRS may enforce a 50% excise tax on the amount that was to be distributed. 

Plan sponsors who face potential disqualification for failure to pay RMDs in a timely manner can use the IRS Self Correction Program (SCP) to correct RMD failures. Unfortunately, plan participants cannot use the SCP to waive the excise tax for RMD failures. 

Retirement Account Distributions and Tax Questions for Maryland Taxpayers 

It is easy to forget about an initial RMD for people who have spent their whole life putting retirement savings away, never to be touched. However, forgetting about the RMDs can result in a hefty excise. tax. If you have any questions about minimum withdrawals, withdrawal deadlines, or any other tax issues, contact an experienced Maryland tax attorney. Contact Gabaie & Associates, LLC for a free consultation on your state or federal tax issue at (410) 862-2198.