Retirement & Taxes in 2020: Are You Prepared for the Changes?
Recent legislation significantly impacts retirement savings. One notable change involves required minimum distributions (RMDs). This post discusses the change, how it impacts retirement savings, and how taxpayers can minimize potential penalties.
What are RMDs?
Retirement funds may not be kept in an account indefinitely. The RMD is the minimum amount a taxpayer is required to withdraw from a retirement plan each year. The Internal Revenue Service (IRS) requires RMDs to better ensure that the agency receives tax payment on retirement savings.
Retirement accounts with an RMD include IRAs (both SIMPLE and SEP), 401(k)s and other defined contribution plans. Note that Roth IRAs, however, do not require withdrawals prior to the owner’s death.
How did tax rules about RMDs change?
Previously, RMDs generally were required to begin when a taxpayer reached age 70 ½. With enactment of the SECURE Act, the age for required minimum distributions is increased to 72 for those distributions required to be made after December 31, 2019.
What happens if a taxpayer does not take the RMD?
Failure to make the RMD generally results in an excise tax equal to 50% of the amount by which the RMD exceeds the actual amount distributed.
Obviously, taxpayers minimize their risk of incurring penalties by timely making their RMDs. However, taxpayers should note that they may receive a refund of the excise tax descried above if the IRS recognizes their circumstances as providing good reason for not making an RMD. A tax professional is a valuable resource in assisting taxpayers in that endeavor.
Remember, there are options for those who believe the IRS is issuing unwarranted tax penalties on retirement accounts.
If you have questions or concerns about tax penalties resulting from your retirement account, contact Frost Law today at 410-497-5947.