Retirement account owners must take required minimum distributions from traditional IRAs and 401(k)s after a certain age. The SECURE 2.0 Act, which was signed into law in December 2022, changes the RMD rules for retirement savers beginning in 2023.
The new RMD rules for 2023 include:
— A higher RMD age.
— A lower penalty for missing a withdrawal.
— New rules for qualified charitable distributions.
— The Roth 401(k) RMD will be eliminated.
[READ: How to Take Required Minimum Distributions.]
A Higher RMD Age
Prior to the SECURE 2.0 Act, the age to start RMDs was 72 for retirement accounts including traditional IRAs and 401(k)s. The new law raises the RMD age in two steps. The RMD age increases to 73 beginning in 2023. In 2033, the RMD age will further increase to 75. Individuals who were born between 1951 and 1959 will need to start their RMDs after age 73. Those born in 1960 or later can delay RMDs until after age 75.
There are important deadlines for when individuals must begin retirement account withdrawals. You get extra time to take your first RMD, but subsequent RMDs must be taken each calendar year. For individuals turning 72 in 2023, there will be upcoming choices surrounding the first RMD.
“It can be withdrawn either by Dec. 31, 2024, or it can be delayed no later than April 1, 2025,” says Ohan Kayikchyan, a financial planner in Culver City, California. “If you decide to delay your first RMD to April 1, 2025, then you need to take two RMDs in one tax year.” You might look at your upcoming taxes or speak to a professional about the difference. The best approach will depend on your income and tax circumstances.
For those who have sufficient income from Social Security benefits and other sources, the higher RMD brings certain advantages. “This increase in the age to take RMDs will allow people’s retirement savings to grow tax-free for a longer time period,” says Doug Carey, owner and president of WealthTrace, a financial planning and retirement planning software company in Zionsville, Indiana. “This is a boon to those who aren’t using their retirement savings to meet all of their expenses.”
The change could also bring savings in Medicare costs. “The delay in taking RMDs might also help temporarily reduce premiums for Medicare Part B and D because the cost of Medicare premiums are tied to income,” Carey says. “When retirees take distributions from pre-tax retirement accounts, it increases their income.” By waiting on withdrawals, your income could be less, leading to lower Medicare premiums during that time.
However, the delay in retirement account distributions could also lead to higher taxes at later stages of retirement. Individuals who don’t withdraw funds early could have higher RMDs later, leading to a larger tax bill.
“It could also result in a larger portion of pre-tax accounts passing to heirs, assuming one used less of their qualified account during their lifetime,” says David Edmisten, founder of Next Phase Financial Planning in Prescott, Arizona. This could potentially result in higher taxes for the account beneficiaries.
[See: 9 Ways to Avoid the 401(k) Early Withdrawal Penalty and Other Fees]
Lower Penalty for Missing a Withdrawal
Account holders who do not take a RMD at the correct time typically face penalties. Before the SECURE 2.0 Act, the tax penalty was 50% on the required amount that was not withdrawn. If an individual failed to take a RMD of $2,000, they would need to pay a 50% tax penalty, or $1,000. The SECURE 2.0 Act changes this penalty to 25%. In the case of a missed RMD of $2,000, the charge would be $500. “If the account holder corrects the mistake quickly, the penalty declines to 10%,” Carey says. If an individual can demonstrate that the missed RMD was due to an error, and reasonable steps are being taken to resolve the issue, the IRS can waive the penalty.
While the new rules reduce the penalty, those who take RMDs as laid out in the law will not face the extra charges. “It’s very important to stay on top of RMDs to avoid what is still a significant penalty,” says Dennis De Kok, owner of FCM Financial Planning in Grand Rapids, Michigan. You might set a reminder on your calendar regarding RMDs. Talking to your financial advisor and setting up automatic withdrawals are additional ways to avoid the penalty.
New Guidance for Qualified Charitable Distributions
Account holders age 70 1/2 and older can currently make IRA qualified charitable distributions of up to $100,000 each year without owing income tax on the transaction, which can also count as your RMD for that year. The qualified charitable distribution limit will now be linked to inflation and could increase in future years. Account holders may give a one-time gift of up to $50,000 directly to an eligible entity through a charitable gift annuity, charitable remainder unitrust or charitable remainder annuity trust.
A qualified charitable distribution can be used to satisfy part of all of your IRA minimum distribution requirement. “If you are planning to limit your distributions to the RMD amount, you will need to make sure part of that required minimum distribution is going directly to a qualified charity,” De Kok says. “This effectively lowers your taxable income by the qualified charitable distribution amount.”
[See: 10 Tax Breaks for People Over 50.]
The Roth 401(k) RMD Will Be Eliminated
Based on the SECURE 2.0 Act, Roth 401(k) account holders will no longer have to take RMDs. This aligns Roth 401(k)s with Roth IRAs, which also do not require distributions in retirement. Prior to the change, individuals with a Roth 401(k) would need to roll the account into a Roth IRA when they retired to skip the RMDs. Now the additional step is not necessary to avoid RMDs.
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New RMD Rules for 2023 originally appeared on usnews.com