April 1, 2023 is the deadline for federal employees and retirees born between January 1 and December 31, 1950 and who own traditional IRAs to take their first traditional IRA required minimum distribution (RMD).
This column discusses what a traditional IRA RMD is, how the RMD is calculated, and the IRS penalty for not making a timely RMD.
What is an RMD?
SEE ALSO: New TSP RMD Rules Included in Passage of Secure Act 2.0
RMDs are minimum amounts that traditional IRA owners and retirement plan account participants (including the TSP) must withdraw annually, starting with the year they reach age 72 (or age 73 if they reach age 72 after December 31, 2022). Most retirement plan account owners can delay taking their RMDs until the year they retire from the private company or government sponsoring the retirement plan.
But traditional IRA account owners must begin taking their RMDs once the account owner is age 72. This is the case even if they are still working and contributing to a company or government retirement plan. These employees including federal employees who reach their “required beginning date” (RBD) (the age they must take their first RMD – age 70.5, age 72, age 73 or age 75, depending in what year they were born).
A traditional IRA owner must take his or her first RMD for the year in which he or she reaches their RBD no later than April 1 of the following year.
This means that if a federal employee or a retiree became age 72 anytime in 2022, his or her first traditional IRA RMD must be taken no later than April 1, 2023. Note that while April 1, 2023 is a Saturday, the IRS does not extend the RMD deadline to the next business day (Monday, April 3, 2023).
How is the Traditional IRA RMD Calculated?
In general, a traditional IRA RMD in any yar is calculated for a traditional IRA by dividing the prior December 31 balance by a life expectancy factor that the IRS publishes in tables in IRS Publication 590-B (Distributions from Individual Retirement Arrangements). An individual will choose the life expectancy table based on his or her situation. The following is a description of each table:
• Single Life Expectancy Table I. Use this table if one is a beneficiary of an account (an inherited IRA):
• Joint and Last Survivor Table II. Use this table if the sole beneficiary of the IRA account is a spouse and the spouse is more than 10 years younger than the traditional IRA owner; or
• Uniform Lifetime Table III. Use this table if a spouse is not the sole IRA beneficiary or the spouse is not more than 10 years younger than the traditional IRA owner.
A traditional IRA owner must calculate the RMD separately for each traditional IRA he or she owns. However, he or she can withdraw the total amount from one or more if the traditional IRAs. The following example illustrates:
The following example illustrates:
Stephanie became age 72 in September 2022. She owns three traditional IRAs, and her first traditional IRA RMD is due no later than April 1, 2023. One of her traditional IRA (Traditional IRA 1) had an account balance of $18,200 as of December 31, 2021; another traditional IRA (Traditional IRA 2) had an account balance of $55,700 as of December 31, 2021; and another of her traditional IRAs (Traditional IRA 3) had an account balance of $127,300 as of December 31, 2021.
The combined balance in Stephanie’s three traditional IRAs as of December 31,2021 is $18,200 plus $55,700 plus $127,300, or $201,200. Using IRS’ IRS’ Uniform Lifetime Table III (a portion of which is shown here), Stephanie computes her first year traditional IRA RMD as follows:
Combined Traditional IRA balances as of December 31, 2021/Uniform Lifetime Table III Single Life Expectancy (age 72)
equals
$201,200/27.4 years = $7,343.06
Note the following:
1. Stephanie has until April 1,2023 to withdraw the $7,343. 06 traditional IRA RMD for the year 2022.
2. Stephanie can withdraw the $7,343.06 from any of her traditional IRA accounts, or spread the $7,343.06 distribution over all three traditional IRA accounts.
3. Stephanie must take a second traditional IRA RMD during the year 2023. This second traditional IRA RMD during the year 2023: (1) Is for the year 2023; (2) Must be taken no later than December 31, 2023; and (3) Is based on Stephanie’s three traditional IRA balances as of December 31, 2022. She must use a life expectancy factor of age 73 (26.5 years, see Table III above) because she becomes age 73 in September 2023.
Other Information with Respect to Traditional IRA RMDs
There is other information that traditional IRA owners should be aware of with respect to traditional IRA RMDs, including:
• Although the IRA custodian may calculate the RMD for the IRA owner, the IRA owner is ultimately responsible for taking the correct traditional IRA amount.
• If a traditional IRA owner does not take his or her RMD by the deadline, the amount not withdrawn is subject to a 50 percent excess tax. SECURE Act 2.0 dropped the excess tax rate to 25 percent, possibly 10 percent if the RMD deficiency is corrected within two years.
• A traditional IRA owner can withdraw more than the traditional IRA RMD for the year. However, a distribution in excess of the RMD for one year cannot be applied to the RMD for the next year.
• The penalty for not taking one’s traditional IRA can be waived if the traditional IRA owner can establish that the shortfall in distributions was due to reasonable error and that reasonable steps are being taken to remedy the shortfall. In order to qualify for this relief, the IRA owner must file IRS Form 5329 and attach a letter of explanation.
• A traditional IRA RMD is taxed at the IRA owner’s marginal tax rate in the year the RMD is withdrawn.
• A traditional IRA RMD amount cannot be rolled over into another tax-deferred traditional account, including the traditional TSP.