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
- 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:
- 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2.0, the penalty was 50% of the difference between the amount that should have been distributed and the amount actually withdrawn.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).
- 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.)
- 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.
- RMDs are annual withdrawals the federal government requires from most retirement accounts after you reach a certain age, including traditional IRAs, SEP and SIMPLE IRAs, and work-based plans such as 401(k), 403(b), and 457(b).
- The SECURE 2.0 Act raised the RMD starting age to 73 for those reaching age 72 after December 31, 2022, and will raise it further to 75 in 2033.
- The penalty for missing or underfunding an RMD was reduced from 50% to 25% of the shortfall, and may be reduced to 10% if corrected in a timely manner.
- Beginning in 2024, employer-sponsored Roth 401(k) accounts are no longer subject to RMDs during the original account owner’s lifetime.
- Surviving spouses who are sole beneficiaries of a work-based account can now treat the account as their own and use the more favorable uniform lifetime table to calculate RMDs.
- RMDs are calculated by dividing the prior December 31 account balance by a life expectancy factor from IRS Publication 590-B.
- If you have multiple IRAs, calculate an RMD for each separately, but you can satisfy the total by withdrawing from any one or more of them. Work-based plans require separate RMDs per plan.
- Taking two RMDs in one year – by delaying the first and taking the second on schedule – can have significant income tax consequences.
Frequently Asked Questions
What is an RMD and who has to take one?
A required minimum distribution (RMD) is the minimum amount the IRS requires you to withdraw annually from most retirement accounts once you reach RMD age. This applies to traditional IRAs, SEP and SIMPLE IRAs, and work-based plans such as 401(k), 403(b), and 457(b) accounts. Roth IRAs are exempt during the original owner’s lifetime, and beginning in 2024, employer-sponsored Roth 401(k)s are as well.
What age do RMDs start under the SECURE 2.0 Act?
It depends on your birth year. If you reached age 72 after December 31, 2022, your RMD age is 73. If you reach age 73 after December 31, 2032, your RMD age will be 75. Prior to the SECURE Act of 2019, the threshold was 70.5. These changes give retirees more time to let their accounts grow before mandatory withdrawals begin.
How do I calculate my RMD?
Divide your account balance as of December 31 of the prior year by the life expectancy factor listed for your age in the IRS Uniform Lifetime Table (found in IRS Publication 590-B). For example, a $300,000 IRA balance divided by a factor of 26.5 results in a 2024 RMD of approximately $11,321. If your sole beneficiary is a spouse more than 10 years younger, a different table applies.
What happens if I miss my RMD or take less than the required amount?
The IRS imposes a penalty on the shortfall. Under SECURE 2.0, that penalty was reduced from 50% to 25% of the amount not withdrawn. It can drop further to 10% if the mistake is corrected within the IRS-defined correction window. It’s worth acting quickly if you realize you’ve missed or underfunded an RMD.
Can I delay my first RMD?
Yes, the IRS allows you to delay your first RMD until April 1 of the year following the year you reach RMD age. However, your second RMD must be taken by December 31 of that same year. Taking two RMDs in one calendar year can push you into a higher tax bracket, so it’s worth talking through the timing with your advisor before making that decision.
Sources: Broadridge Investment Management Solutions
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