Required Minimum Distributions (RMDs) are the minimum amounts a retirement plan account owner must take out each year. Legislation known as the SECURE 2.0 Act, passed in late 2022, has changed prior rules related to RMDs.
Effective January 1, 2023, RMDs begin when a person reaches either:
- age 73;
- Age 72 if they reached this age in 2022;
- Age 70½ if they reached this age before January 1, 2020; or
- the year in which a person retires (if after age 73 and if permitted by a person’s retirement plan).
On January 1, 2033, the age for RMDs will increase to 75.
There are some exceptions. In the case of an IRA or where a person is a 5 percent owner of the business that sponsored a retirement plan, the RMDs start at age 73; age 72 (if you reached this age in 2022); or 70½ if you reached this age before January 1, 2020).
Note that “ownership” is broadly interpreted to mean that a person is an “owner” even if the percentage of ownership is held directly or indirectly by their parent, spouse, child, or grandchild.
There is no option to defer RMDs to a later age, even if the individual is still working.
It is the responsibility of each retiree to take out the correct RMD from their retirement account each year. If a retiree does not do so, they can face penalties. Furthermore, upon a person’s death, there are special rules regarding how the remaining funds must be distributed to beneficiaries. These death rules are currently in flux, as explained below.
Current RMD rules apply to all profit-sharing plans, 401(k) plans (including Roth 401(k) plans), 403(b) plans, 457(b) plans, traditional IRAs, SEP IRAs, SARSEPs, and SIMPLE IRAs.
However, starting in 2024, the SECURE 2.0 Act will eliminate RMD requirements for Roth 401(k) plans. This will result in Roth 401(k)s receiving similar RMD treatment as Roth IRAs (see next section).
Do Roth IRAs Have RMDs?
Roth IRAs are presently excluded from the RMD requirement while the account owner is still alive.
How RMD Rules May Affect You
As mentioned above, the onus is on you to ensure you take the correct RMD when you retire or reach a certain age.
The amount of the RMD is calculated for each retirement account by dividing the account’s balance as of December 31 of the prior year by a life expectancy factor outlined in IRS tables.
Many retirement administrators or plan managers can help you with these calculations. Still, you should also try to understand on your own what you are required to withdraw, as you are ultimately responsible for any penalties or taxes that you may incur for incorrect withdrawals.
Unfortunately, the IRS says you can’t keep amounts in your traditional retirement accounts indefinitely, even if you don’t need the income. If you take out less than the RMD for a particular year, you may be subject to a 25 percent excise tax, effective 2023 (this tax was 50 percent before the SECURE 2.0 Act passed), on the amount you didn’t take out but were required to withdraw.
However, in some circumstances, if you made an error in calculations but are in the process of taking corrective action, you may be able to request a waiver or reduction of the excise taxes.
Required Minimum Distribution New Law
In addition to the SECURE 2.0 Act, which increased the RMD beginning age to 73, the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act) changed the RMD rules regarding how quickly beneficiaries must receive retirement benefits upon the account owner’s death. These new rules apply to persons who passed away after December 31, 2019.
Before the SECURE Act, RMD rules required distributions after a person’s death to be made in one of two ways. If the owner died before RMD rules applied to them, their interest had to be distributed as follows:
1. within five years of their death, or
2. over the life or life expectancy of the beneficiary, with distributions beginning no later than one year after the date of the owner’s death (subject to an exception for a surviving spouse).
If the owner died after the RMD applied to them, the beneficiary had to receive payments at least as quickly as the owner had been receiving them.
The SECURE Act has changed these RMD rules in several ways:
1. It lengthens the five-year rule to 10 years.
2. The new 10-year rule applies regardless of whether the owner dies before the required RMD beginning date.
3. The option to distribute the retirement funds over the life or life expectancy of the beneficiary applies only to specific qualifying persons — spouses, minor children, disabled or chronically ill beneficiaries, and beneficiaries who are less than 10 years younger than the owner.
Starting in 2024, the SECURE 2.0 Act will allow the spouse-beneficiary to elect to be treated as the deceased spouse. This means RMDs can be delayed until the deceased spouse would have reached the age at which RMDs begin. The RMDs can then be calculated (using the IRS’ Uniform Lifetime Table) for the age that would have been applicable to the deceased spouse. This allows the “stretching” of RMDs.
If the surviving spouse passes away before the new RMD date, his or her beneficiaries could also benefit from these extended timeframes instead of the 10-year rule.
4. For a beneficiary who is a minor at the date of death, the 10 years begin to run when that child reaches the age of majority.
5. For persons who paid excise taxes for insufficient RMDs for 2021 and 2022, they may be able to request a refund.
6. The Secure 2.0 Act has also implemented new rules for individuals who have special needs trusts.
The IRS has stated it will not assert that an excise tax is due for persons who did not take an RMD under the prior rules for 2021 and 2022. The IRS final regulations related to these changes will not apply sooner than 2023.
The changes to these RMD rules are complex, and there are more details not fully covered by this article. If you have questions about RMDs and how they may affect you, contact an estate planner in your area.