If you are retired or have turned 72 and have invested in a retirement plan, December 31st of each year should be clearly marked on your calendar. That’s the last day you are allowed to take any Required Minimum Distributions or RMDs for the taxable year to avoid a steep IRS penalty. In fact, penalties for mishandling these withdrawals are among the most costly in the entire tax code.
The IRS requires retirement account holders to withdraw a certain minimum amount from their retirement accounts each year once you reach a certain age (except for qualifying distributions from a Roth IRA). The exact amount changes from year to year based on several factors.
Retirement accounts like 401(k)s and Traditional IRAs delay taxation to incentivize you to save more while you are working. But at a certain point the IRS wants to begin collecting taxes, which they can do when you make a withdrawal (which the IRS calls a distribution) from your retirement accounts.
The SECURE Act went into effect on January 1, 2020 and increased the age at which you must take your first required minimum distribution from 70 ½ to 72 years. With these changes, if your 70th birthday is July 1, 2019 or later, you do not have to take withdrawals until you reach age 72.
Every year your RMD must be taken by December 31, except for the year in which you turn 72 when it may be taken as late as April 1 of the following year.
If you do not take your RMD in time or if you fail to withdraw the full amount, the IRS will impose a significant penalty equal to 50% of your RMD amount not withdrawn.