Navigating the complexities of retirement planning can be challenging, and one critical aspect to consider is Required Minimum Distributions (RMDs) for your 401(k) account. It is important to understand how RMDs are calculated so that you can make informed decisions regarding your retirement savings.
Changes to Required Minimum Distributions Age:
The SECURE Act of 2019 brought significant changes to RMDs by increasing the age at which they begin from 70½ to 72. The recent Secure 2.0 legislation further pushes the RMD age to 73 for individuals who turn 72 on or after January 1, 2023. This means that those who reach age 72 in 2023 are not required to take an RMD for that year. It’s important to note that the RMD age will change again in 2033, increasing from 73 to 75.
Calculations and Delayed Start:
Effective for Required Minimum Distributions made after December 31, 2022, the RMD age increases to 73 for IRA owners who turn 72 after December 31, 2022. If you turn 72 in 2023 or later, you are not required to take an RMD until the year you turn 73. However, if you reached age 72 in 2022 or earlier, you must continue taking your minimum distributions as before, with no changes affecting individuals who reached RMD age prior to 2023.
For example, let’s say Stewart celebrates his 72nd birthday on April 2, 2023, and holds a traditional IRA. Thanks to Secure 2.0, Stewart can delay his RMD from his IRA for another year, starting in 2024 when he turns 73. His first RMD, for 2024, can be postponed until April 1, 2025. However, Stewart will need to take two RMDs in 2025: the delayed 2024 RMD and the 2025 RMD, which must be withdrawn by December 31, 2025.
Multiple Accounts:
It’s important to note that if an individual has multiple 401(k) accounts, they must calculate and take the RMD separately for each account. On the other hand, if an individual has multiple traditional IRAs, the RMD calculation can be aggregated and taken from any one or a combination of their IRAs. However, RMDs from Roth IRAs are not required during the account owner’s lifetime.
No RMDs for Roth Employer Plan Accounts:
Previously, Roth IRA account owners were exempt from taking lifetime RMDs, but this exception did not apply to Roth accounts under employer-sponsored retirement plans. Secure 2.0 eliminates lifetime RMDs for Roth designated accounts in employer-sponsored plans, effective for taxable years beginning after December 31, 2023. However, for retirees who turn 73 in 2023, RMDs from Roth accounts must still be made by April 1, 2024.
Reduced Penalty and Statute of Limitations: Making mistakes with RMDs, such as forgetting to withdraw or taking too little, used to subject account owners to a hefty 50% penalty tax. Secure 2.0 reduces this penalty tax to 25%, and if the mistake is corrected within a two-year “correction window,” the penalty is further reduced to 10%. The legislation also introduces a three-year statute of limitations for assessing the RMD penalty tax.
Conclusion:
Understanding the calculation and requirements of Required Minimum Distributions (RMDs) is crucial for effective retirement planning. Be aware of the changes brought by the SECURE Act and Secure 2.0 legislation, including the delayed RMD age to 73 and the elimination of lifetime RMDs for certain accounts. Consult with a Fee-Only financial advisor to ensure compliance with RMD rules and make the most of your retirement savings. By staying informed and proactive, you can navigate the RMD landscape with confidence and pave the way for a secure and fulfilling retirement.
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