A message from Laurie about the new RMD rules

It has been difficult to track the multitude of changes to RMD rules over the last 3 years. In 2020, the starting age for RMDs was raised from 70 ½ to 72. That same year, RMDs were ultimately suspended for a year because of the pandemic.

In 2022, the IRS changed the tables used to calculate RMDs. The starting age stayed at 72, but nearly every age saw a small reduction in their RMD. For example, a retiree taking their first distribution saw the amount required as a percent of the account balance fall from 3.91% to 3.65% while an 85-year-old saw their RMD reduced from 6.76% to 6.25%.

The Secure Act 2.0 enacts the following changes.

  1. Beginning January 1, 2023, the first RMD is now required at age 73. For anyone age 72 or older prior to 2023, this change is irrelevant as their RMDs have already begun. When someone turns 73 in future years, they technically have the option to delay taking their first RMD until April 1 of the year following their 73rd birthday. However, they would then have to take their age 74 distribution by December 31 of that year as well. It is rarely beneficial to take two RMDs in the same year, so a good rule of thumb is to take the first RMD the year someone turns 73.
  2. Barring another change, the beginning RMD age increases again in 2033 to age 75. Essentially, anyone born in 1960 or later will have an effective RMD starting at age 75.
  3. Starting in 2024, Roth accounts in qualified retirement plans, such as Roth 401(k)s or Roth 403(b)s, are no longer required to take RMDs. Individual Roth IRA account owners have never been subject to RMDs, and accounts are only subject to distribution rules upon the death of the account owner. Since nearly all Roth 401(k) and Roth 403(b) account owners roll their accounts to an individual Roth IRA to avoid RMDs, this rule change has minimal impact except to eliminate an unnecessary step.
  4. Also starting in 2024, If a retirement account owner dies, a surviving spouse beneficiary may elect to take RMDs based on the deceased spouse’s RMD factors alone. This may help a surviving spouse who inherits an account from a spouse who was substantially younger than them. Previously, a surviving spouse could delay RMD’s until the deceased spouse would have reached age 72, but the RMD calculations were then based on their current age, not the deceased spouse’s age.

One welcome added change is the reduction in the IRS penalty for taking too small an RMD or for failing to take one at all. Previously, the penalty was 50% of the missed RMD amount. For instance, if an RMD was supposed to be $25,000 and the account owner only took out $15,000, the penalty would be $5,000 based on the $10,000 shortfall. This seemed less of a deterrent and more punitive than warranted.

Moving forward, penalties are reduced to 25% of the RMD shortfall. In addition, there is a “correction window” that allows the penalty to be reduced to 10%. In general, if the error is corrected by the end of the year following the year the RMD mistake was made, the penalty will be reduced to 10%.

These changes add flexibility to the retirement planning options for many people, and that is a good end result. Still, just because an RMD can now be delayed to age 73 does not mean that it should be. Careful cash flow planning that includes Social Security, pension, and any other income should ultimately dictate when distributions are taken from retirement accounts.

If you have any questions about how this effects your personal situation, please call our office and we will be glad to help.