Just before the end of 2022, the SECURE 2.0 Act of 2022 was signed into law as part of the Consolidated Appropriations Act of 2023. One of the changes included in the Act delays the age for required minimum distributions from IRAs and company retirement plans, and it is likely to impact you in some manner.
Perhaps you help a parent or other relative calculate their RMD even if you or your spouse/partner are not yet taking RMDs. In any case, it is important to have a plan or strategy for RMDs in your retirement years. You will be taxed as if your distributions are part of your ordinary income and that may affect your tax bracket and therefore the amount of taxes you pay.
What Are Required Minimum Distributions?
A required minimum distribution is the amount of money that must be withdrawn from an employer-sponsored retirement plan, traditional IRA, SEP, or SIMPLE IRA by owners and qualified retirement plan participants of retirement age.
You may recall that investments in these retirement plans are not subject to income or capital gains taxes from year to year. Only when funds are removed from the account or plan are taxes assessed. A required minimum distribution acts as a safeguard against people using a retirement account to avoid paying taxes indefinitely.
The amount that is required to be withdrawn is set by law and there are penalties if you do not comply, although SECURE 2.0 reduced the penalty from 50% to 25% and even 10% if corrected in a “timely manner.”
(Roth IRAs do not require a minimum distribution until the death of the owner when the account becomes an Inherited Roth IRA. Roth designated accounts that are part of employer retirement plans are subject to RMD only through December 31, 2023.)
How Are RMDS Computed?
RMDs are determined by dividing the retirement account’s prior year-end fair market value by the applicable distribution period or life expectancy. The Internal Revenue Service has a worksheet to help taxpayers calculate the amount they must withdraw. The calculation is different for couples when a spouse is the sole beneficiary and is 10 years or more younger than the other.
Generally, your account custodian or plan administrator will calculate the amounts and report them to the IRS and to you. Often, but not always, you can choose to take an RMD from each of your retirement accounts or combine the value and take a distribution from just one account.
Your employer, account custodian, or financial advisor can help you determine your distribution amount, and an advisor can help you determine the best distribution strategy.
The New Rules
If you started taking RMDs before 2022, there is no change for you. If you turned 72 during 2022 and have not taken an RMD, you need to take your first RMD (for 2022) no later than April 1, 2023; and then will also need to take an RMD for 2023.
Your 2022 RMD will be based on the market value of your retirement account(s) on December 31, 2021, and your 2023 RMD will be based on the market value on December 31, 2022. If you took your first RMD sometime during 2022, you only need to take one RMD in 2023, and it will be based on the market value of your retirement account on December 31, 2022.
However, if you turn 72 after December 31, 2022, your RMD age will now be 73. You do not have to take an RMD in 2023. By the way, in 10 years, the RMD age will increase to 75. That is due to growing life expectancy and increasing retirement age.
It should be noted that while you must withdraw the RMD amount, you can also withdraw above that amount. If you want to withdraw 100% of your account in the first year or any year, that’s perfectly legal, but the tax bill could be a bit of a shock. Please also note that there are different rules, one is mentioned above, for Inherited IRAs.
Let’s Have a Conversation:
What questions do you have about the new age requirement for RMDs? Would you like to see more information about Inherited IRAs? How do you view an RMD in your overall retirement income plan?
