Dear Dan,
I understand the penalty is 50% for missing a mandatory payout from a retirement account. I don’t have mandatory payouts because I’m still working but I’ll be 75 in June and think 2024 might be my last year working. If I hang them up in December, will my employer have to cooperate and pay my mandatory amount by the end of the year?
—Tom in Edina
Dear Tom,
With respect to how quickly an employer must respond to an employee request, those parameters will be outlined in the plan documents which must be made available to all participants. If you retire in 2024, the tax code allows you to take your Required Minimum Distribution (RMD) in 2024 but it is not required. More on that in a minute.
Read:Are you taking an RMD? 10 smart things you can use it for right now.
Before I get into more of the rules, I noticed you said “payouts.” If you are using the plural because you have more than one plan, you may have a problem. The exemption from RMD due to continued working only applies to a qualified retirement plan at your current place of employment. So, if you have a plan at a prior employer or own IRA accounts, you should have been taking distributions for tax years 2019 and later.
While the current starting age for RMD is 73, it was 70 ½ for tax year 2019. Since you turn 75 in June, you turned 70 in June of 2019 and therefore 70 ½ in 2019.
Read: What’s the best way to take RMDs from your retirement accounts? Experts rate the top 3 strategies.
If you retire in 2024, you calculate your first RMD by dividing the account value as of 12/31/2023 by 24.6, the factor from the Uniform Lifetime Table. If you are married to someone more than 10 years younger than you, a different table, the Joint and Survivor Table, applies with larger factors resulting in lower RMD. The Uniform Lifetime Table starts on page 25 and the Joint and Last Survivor Table starts on page 27 of this document.
That first RMD amount must be paid out to you by April 1, 2025. You cannot direct that RMD to another retirement account or convert it to a Roth account. Also, unlike Qualified Charitable Distributions from an IRA, you cannot donate any of it directly to a charity and exclude it from your income. If you delay the RMD into 2025, it will be reported as income on your 2025 tax return even though it counts as your RMD for tax year 2024.
Assuming you do not have a spouse, or your spouse is not more than 10 years your junior, your second RMD will be due by 12/31/2025 and will be calculated as the balance as of 12/31/2024 divided by 23.7, the Uniform Lifetime Table factor applicable to a 76-year-old. If you have a spouse more than 10 years your junior, you use the other table. This 2025 RMD is reported on your 2025 tax return. There is no adjustment of the 12/31/2024 balance for an RMD taken in 2025 for that first 2024 RMD.
So, Tom, if you are looking at retiring late in 2024 and intend to put off the 2024 RMD into 2025, note you will report it and the 2025 RMD on your 2025 return. If that would push you into a higher tax bracket, then you either need to make sure you retire early enough to get the 2024 RMD out of the plan before year-end or retire after the new year’s so no 2024 RMD is needed.
Every year after retirement, you divide the balance as of 12/31 of the prior year by the new factor based upon your age as of the end of the current tax year. For example, your 2030 RMD is based on the 12/31/2029 balance and 19.4 — the factor for 81-year-olds, your age at the end of 2030, if using the Uniform Lifetime Table.
One other note: the penalty for missing a RMD is only applied to the shortfall, not the full amount of the RMD or the taxes paid. If you were supposed to take $ 20,000 and took only $ 10,000, the penalty is $ 2,500. The “Secure Act 2.0” reduced the penalty from the long standing 50% you mentioned to a still significant 25%. In certain circumstances, the penalty can be reduced further to 10% or even waived.