With the ever-evolving landscape of financial planning, staying abreast of legislative changes is crucial for anyone looking to secure a comfortable retirement, and something we keep an eye on for you here at Stone Oak Wealth Management. One such significant development is the SECURE 2.0 Act, a legislative milestone passed in late 2022. This sweeping piece of legislation introduces a host of provisions that directly affect retirement savings plans, sending ripples through the financial world.

The SECURE 2.0 Act included numerous provisions affecting retirement savings plans, including some that impact required minimum distributions (RMDs). Here is a summary of several important changes, as well as a quick primer on how to calculate RMDs.

What Are RMDs?

Retirement savings accounts are a great way to grow your nest egg while deferring taxes. However, Uncle Sam generally won’t let you avoid taxes indefinitely. RMDs are amounts that the federal government requires you to withdraw annually from most retirement accounts after you reach a certain age. Currently, RMDs are required from traditional IRAs, SEP and SIMPLE IRAs, and work-based plans such as 401(k), 403(b), and 457(b) accounts.

If you’re still working when you reach RMD age, you may be able to delay RMDs from your current employer’s plan until after you retire (as long as you don’t own more than 5% of the company); however, you must still take RMDs from other applicable accounts.

While you can always withdraw more than the required minimum, if you withdraw less, you’ll be subject to a federal penalty.

Four Key Changes

  1. Age Requirement is now up to 75

Perhaps the most notable change resulting from the SECURE 2.0 Act is the age at which RMDs must begin. Prior to 2020, the RMD age was 70½. After passage of the first SECURE Act in 2019, the age rose to 72 for those reaching age 70½ after December 31, 2019. Beginning in 2023, SECURE 2.0 raised the age to 73 for those reaching age 72 after December 31, 2022, and, in 2033, to 75 for those who reach age 73 after December 31, 2032.

When Must RMDs Begin:

Rmd 2024 Age Brackets

  1. Federal penalty reduced if taking less then the RMD

A second important change is the penalty for taking less than the total RMD amount in any given year. Prior to passage of SECURE 2.0, the penalty was 50% of the difference between the amount that should have been distributed and the amount actually withdrawn. The tax is now 25% of the difference and may be reduced further to 10% if the mistake is corrected in a timely manner (as defined by the IRS).

  1. Employer-Sponsored Roth 401(k)s no longer subject to RMD

A primary benefit of Roth IRAs is that account owners (and typically their spouses) are not required to take RMDs from those accounts during their lifetimes, which can enhance estate-planning strategies. A provision in SECURE 2.0 brings work-based Roth accounts in line with Roth IRAs. Beginning in 2024, employer-sponsored Roth 401(k) accounts will no longer be subject to RMDs during the original account owner’s lifetime. (Beneficiaries, however, must generally take RMDs after inheriting accounts.)

  1. Spouse benefits for Employer-Sponsored Roth 401(k)s

Similarly, a provision in SECURE 2.0 ensures that surviving spouses who are sole beneficiaries of a work-based account are treated the same as their IRA counterparts beginning in 2024. Specifically, surviving spouses who are sole beneficiaries and inherit a work-based account will be able to treat the account as their own. Spouses will then be able to use the favorable uniform lifetime table, rather than the single life table, to calculate RMDs. Spouses will also be able to delay taking distributions until they reach their RMD age or until the account owner would have reached RMD age.

How to Calculate RMDs

RMDs are calculated by dividing your account balance by a life expectancy factor specified in IRS tables (see IRS Publication 590-B). Generally, you would use the account balance as of the previous December 31 to determine the current year’s RMD.

For example, say you reach age 73 in 2024 and have $300,000 in a traditional IRA on December 31, 2023. Using the IRS’s Uniform Lifetime Table, your RMD for 2024 would be $11,321 ($300,000 ÷ 26.5).

The IRS allows you to delay your first RMD until April 1 of the year following the year in which it is required. So in the above example, you would be able to delay the $11,321 distribution until as late as April 1, 2025. However, you will not be allowed to delay your second RMD beyond December 31 of that same year — which means you would have to take TWO RMDs in 2025. This could have significant implications for your income tax obligation, so beware.

Have multiple IRAs?

An RMD is calculated separately for each IRA you have; however, you can withdraw the total from any one or more IRAs. Similar rules apply to 403(b) accounts. With other work-based plans, an RMD is calculated for and paid from each plan separately.

The intricacies of the financial world keep evolving among ongoing legislative changes.  Staying abreast is cornerstone of a resilient retirement plan. Whether you’re a seasoned investor or in the middle of your financial journey, understanding the SECURE 2.0 Act’s impact on required minimum distributions is important if it plays a part in your later year’s financial planning. By partnering with a wealth management company, you can navigate these changes with confidence, ensuring that your retirement strategy remains robust in the face of changing regulations. Embrace the opportunities that this new legislation presents and empower yourself to make informed decisions that pave the way for a secure and prosperous retirement.


Schedule Meeting

Sources: Broadridge Investment Management Solutions

Stone Oak Wealth is regulated by the SEC as a registered investment adviser. Please see visit Legal Disclosures for additional advertising disclosures.