After a certain age, retirement account owners are required to take minimum distributions from traditional IRAs and 401(k)s. The SECURE 2.0 Act has changed the rules, reports the article “New RMD Rules for 2023” from U.S. News & World Report.
Before the SECURE 2.0 Act, the age to start RMDs was 72 for retirement accounts, including both traditional IRAs and 401(k)s. Now, the RMD age has increased in two steps. Starting in 2023, the RMD age increases to 73, and in 2033, the RMD age will increase to 75. If you were born between 1951 and 1959, you’ll need to start RMDs after age 73. Born after 1960? You can delay RMDs until after age 75.
There are important deadlines, and while you get extra time to take your first RMD, you must take subsequent RMDs every calendar year.
Here’s the twist: remember, RMDs are taxable. If you take your first RMD in 2023 because you celebrate your 72nd birthday that year, you’ll have some decisions to make. You can take the RMD by December 31, 2024, or delay it to no later than April 1, 2025. But if you delay it to April 2025, you’ll take two RMDs in one tax year.
If your income from Social Security and other sources is more than you need, those higher ages for RMDs have their advantages. Retirement savings accounts may grow tax-free for a longer period of time. The change may also bring savings in Medicare costs. The price of Medicare premiums is tied to income. When retirees take distributions from pre-tax retirement accounts, it increases their income and their premiums. By waiting on withdrawals, income can be lowered, leading to lower Medicare premiums at that time.
However, the delay in taking distributions may also lead to higher taxes during later stages of retirement. If you don’t take funds early, you may find yourself with higher RMDs later, leading to larger tax bills.
Account owners who don’t take an RMD at the right time usually face harsh penalties. Prior to the SECURE 2.0 Act, the tax penalty was 50% on their required amount not withdrawn. Now the penalty is 25%. If the mistake is corrected quickly, the penalty can even decline to 10%, as long as the person can demonstrate the missed RMD was due to an error and reasonable steps are being taken to resolve the issue.
There are changes to qualified charitable distributions as well. Account owners age 70 ½ and older may now make IRA qualified charitable distributions of up to $100,000 per year without owing income tax on the transaction, which can count as their RMD for the year. The qualified charitable distribution limit is now linked to inflation and may increase in future years. A one-time gift of $50,000 may be made directly to an eligible entity through a charitable gift annuity, charitable remainder unitrust or charitable remainder annuity trust.
Based on the SECURE Act 2.0, Roth 401(k) account owners no longer have to take RMDs at all. This aligns the Roth 401(k) with Roth IRAs, which also do not require any distributions in retirement. Talk with your estate planning attorney to discuss any advanced estate planning strategies that may be available to minimize taxes for your estate.
Reference: U.S. News & World Report (Feb. 10, 2023) “New RMD Rules for 2023”
