RMD Discussion

SECURE Act 2.0 and Required Minimum Distributions

On December 29th, 2022, the Setting Every Community Up for Retirement (SECURE) Act 2.0 was signed into law by Congress. Its 92 new provisions were put in place to help strengthen the retirement system and provide increased opportunities for saving for retirement. Among the provisions adopted were higher catch-up contributions starting in 2025 for individuals ages 60 through 63, employer matching for Roth accounts, and 529-to-Roth transfers for 529 beneficiaries starting in 2024. For people in or approaching retirement, the biggest change was that the Required Minimum Distribution age was pushed out further.

What Is a Required Minimum Distribution?

A Required Minimum Distribution (RMD) is an amount that you are required to take from your retirement account(s), such as employer-sponsored plans (401(k)s, 403(b)s, 457(b)s, etc.) or traditional IRAs, when you reach a certain age. The IRS allows you to defer taxes on contributions made, income earned, and market appreciation while you are working toward retirement. Eventually the IRS wants to collect the taxes on this money that you have deferred. 

History of the Required Minimum Distribution

The Tax Reform Act of 1986 was the first piece of legislation to establish RMDs from qualified retirement accounts. It set the date when RMDs were required to begin as the year in which an individual reached age 70 ½. It remained 70 ½ until 2019, when the SECURE Act raised it to age 72. SECURE Act 2.0 raised the age for RMDs to 73 for individuals born between 1951 and 1959, and age 75 for those born in 1960 or later.

First Year Required Minimum Distribution Options

In the first year for which you are required to take an RMD, you have two choices – you can take it in that year or no later than April 1st of the following year. If you wait until the following year to take your first withdrawal, you’ll have to take two withdrawals in that year, which may increase your tax liability. If you are still working when you reach your RMD age, you don’t have to begin taking RMDs from your employer plan accounts until you retire, but you will still need to take RMDs from your traditional IRA accounts.

Rules for Roth Retirement Accounts

Currently, employer plan Roth accounts are subject to RMDs beginning at age 72. Starting in 2024, RMDs for employer plan Roth accounts will be eliminated. RMDs are already not required to be taken from Roth IRAs unless you inherit a Roth IRA from a non-spouse.

Death of the “Stretch” IRA

Prior to the original SECURE Act in December of 2019, non-spouse beneficiaries of retirement plans were able to spread the RMDs out over their lifetime. With the passing of the SECURE Act in 2019, non-spouse beneficiaries were required to fully distribute the retirement account within 10 years of the original account owner’s death. It was unclear whether there were to be RMDs during that 10-year period, but the IRS has waived any penalties for not taking RMDs in 2020 through 2023. It is likely that RMDs for non-spouse beneficiaries will need to be taken in the future.

How much is my Required Minimum Distribution?

The amount that you are required to take out is determined by the value of each retirement account at the end of the previous year, and a factor that is applied based on your age and life expectancy. You may take out more than the RMD amount in any given year, but the full amount taken will be taxed as ordinary income, and any excess amount withdrawn will not count toward your RMD for future years.

Can I Combine RMDs for Multiple Retirement Accounts?

If you have more than one IRA account, RMDs must be calculated separately each year but can be aggregated and taken from one account, as can multiple employer retirement plan accounts.  However, you can’t aggregate IRA accounts and employer retirement plan accounts.

What if I Fail to Take My Required Minimum Distribution?

If you don’t take your RMD for the year, you will be subject to paying a 25% penalty on the amount that you failed to pay. If the RMD is paid in a reasonable amount of time, the penalty may be reduced to 10%.

Retirement Saving Opportunities for All

With pensions increasingly becoming a thing of the past, saving for retirement through employer plans and individual IRAs has become the primary focus. Unfortunately, employer plans typically offer savings on a voluntary basis, so many employees have not taken advantage of them. SECURE Act 2.0 puts the spotlight on those who are just starting to save for retirement. For those who have saved throughout their working years, the ability for RMDs to be deferred for longer allows retirement plan and IRA account assets to continue to grow is a big plus. It also gives recent retirees a longer runway for converting pre-tax savings into Roth accounts from the time they retire to the year that they begin taking RMDs.

Written by,

Tim Raftis, CFP®

Tim Raftis, CFP®

Tim Raftis is a comprehensive, fee-only financial planner with Insight Wealth Strategies. With over 30 years in the financial services industry, Tim draws on his extensive experience to offer clients customized solutions to managing their wealth.

Tim is a problem solver who works to simplify clients’ financial lives. He assists clients in identifying and prioritizing their various goals – including investments, tax planning, retirement income, and wealth transfer – then develops strategies customized to suit their personal circumstances and their own unique feelings and attitudes.

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