Dear Dan,
I understand that the penalty is 50% for failure to pay a mandatory payout from a retirement account. I don't have mandatory payments because I'm still working but I'll be 75 in June and I think 2024 might be my last year working. If I suspend it in December, will my employer have to cooperate and pay my mandatory amount by the end of the year?
—Tom in Edina
Dear Tom,
Regarding how quickly the employer will respond to an employee's request, these parameters will be specified in plan documents that must be made available to all participants. If you retire in 2024, the tax code allows you to take a required minimum distribution (RMD) in 2024 but it is not required. More on this in a minute.
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Before I get into more rules, I noticed you said “payments”. If you are using the plural because you have more than one plan, you may have a problem. The RMD exemption due to continued employment only applies to the qualified retirement plan at your current workplace. Therefore, if you have a plan with a former employer or your own IRA accounts, you should have taken distributions for tax years 2019 and beyond.
While the current starting age for the RMD is 73, it was 70 ½ for tax year 2019. Since you turned 75 in June, you turned 70 in June of 2019, and therefore 70 ½ in 2019.
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If you retire in 2024, you will calculate your first RMD by dividing the account value as of 12/31/2023 by 24.6, which is the factor from the Uniform Lifetime Table. If you are married to someone more than 10 years younger than you, a different schedule will apply, the Joint and Survivor Schedule, with greater factors leading to lower musculoskeletal mobility. The Combined Life Table begins on page 25 and the Joint and Final Survivor Table begins on page 27 of this document.
Your first RMD must be paid by April 1, 2025. You cannot direct this RMD to another retirement account or convert it to a Roth account. Also, unlike qualified charitable distributions from an IRA, you can't donate any directly to a charity and have them excluded from your income. If you delay your RMD to 2025, it will be reported as income on your 2025 tax return even though it is considered your RMD for the 2024 tax year.
Assuming you don't have a spouse, or your spouse is no more than 10 years younger than you, the 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 age table factor applies to a person He is 76 years old. If you have a spouse who is 10 years younger than you, you can use the other table. The 2025 RMD is reported on your 2025 tax return. There is no adjustment to the 12/31/2024 balance for RMD earned in 2025 for the first 2024 RMD.
So, Tom, if you're looking to retire in late 2024 and you intend to defer your 2024 RMD to 2025, note that you will report that and your 2025 RMD on your 2025 return. If that would push you into a higher tax bracket, you need to either To ensure you retire early enough to take the 2024 RMD out of the plan before the end of the year or retire after the new year so no 2024 RMD is needed.
Each year after retirement, you divide the balance as of 12/31 of the prior year to the new worker based on 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 81-year-old factor, your age at the end of 2030, if using the Uniform Life Table.
Another note: The RMD loss penalty only applies to the disability, not the full amount of the RMD or taxes paid. If you were supposed to take $20,000 and only got $10,000, the fine would be $2,500. “Secure Law 2.0” has reduced the penalty from the 50% I mentioned a long time ago to a still significant 25%. In certain circumstances, the penalty may be reduced to 10% or even waived.
