Secure 2.0 Act: Key Changes to Required Minimum Distributions
The legislation made important changes to Required Minimum Distributions (RMDs)—here’s what you should know.
By Christopher Wolff
The SECURE 2.0 Act contains dozens of new provisions. Some of the most consequential center on RMDs.
What Are RMDs?
Individuals who contribute to qualified retirement accounts—traditional IRAs, 401(k)s, 403(b)s, etc.—do so using tax-deferred dollars. In other words, an individual does not pay taxes on the contributed money when it is earned. Instead, taxes are deferred until the individual withdraws money from the investment at a later date, ideally when they have less income and their tax bracket is lower.
Originally, an individual could theoretically delay the tax liability indefinitely by never withdrawing the money. However, recognizing this possibility, the IRS established what is known as the Required Minimum Distribution as part of the Tax Reform Act of 1986. The Required Minimum Distribution, as the name implies, is the minimum amount an individual must withdraw from their qualified retirement account every year. The individual then pays taxes on the amount that is withdrawn.
The minimum amount is calculated using a formula involving fair market value of the account, the individual’s age and life expectancy and was originally set to begin at age 70 1/2.
How SECURE 2.0 Changes RMDs
The two areas of RMD the latest legislation impacts are the minimum age requirements and penalties.
Minimum Age. The 1986 act specified required distributions to begin when an individual reaches age 70 ½. In 2019, as a part of the original SECURE Act, the minimum age was increased to 72.
SECURE Act 2.0 pushes back the minimum age again, but in stages. Anyone who turned 72 before 2023 follows the old rules. For individuals who reach age 72 after December 31, 2022, and age 73 before January 1, 2033 (i.e., individuals born from 1951 to 1959), the starting age is 73. Those who reach age 74 after December 31, 2032, must begin taking RMDs at age 75 (i.e., anyone who was born in 1960 or later).
Two important notes to consider. First, SECURE 2.0 does not alter the starting age for Qualified Charitable Distributions, which is 70 1/2. Second, it does not change RMD requirements for beneficiaries.
Penalties. Another notable change is to the penalty assessed when an individual misses an RMD. Prior to SECURE 2.0, the penalty for a missed RMD was 50% of the shortfall. Beginning in 2023, this penalty is reduced to 25%. In addition, if the shortfall is corrected within the “correction window,” the penalty is reduced to 10%.
How the Changes Might Affect You
If you are already taking distributions from your retirement account in order to fund your lifestyle expenses and the amount of those distributions meet or exceed your RMD, then the changes likely won’t affect your situation.
However, if you have not yet started taking your RMDs and you have other resources you can draw from to fund your lifestyle, then you may be able to take advantage of the changes in the new law. For example, there may be opportunities to convert your traditional IRA to a Roth IRA. Or, you may be able to employ other strategies to control the ultimate timing of when your tax is due on the retirement account.
Be sure to collaborate with your tax advisor and financial advisor to discuss the options available to you.
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