Changes to the Required Minimum Distribution Under SECURE 2.0

The Required Minimum Distribution (RMD) rules have changed yet again.

Recently enacted, the SECURE Act 2.0 brought with it changes to current retirement planning policy. This included the Required Minimum Distribution (RMD) rules.

Prior Rules under the SECURE Act

Under previous law, RMDs for Traditional IRAs started in the year that the account holder turned age 70 ½. This rule remains in effect for account holders born before July 1, 1949. However, the original SECURE Act of 2019 adjusted this rule to increase the age for qualification to 72. This includes anyone born between July 1, 1949 and December 31, 1950.

SECURE Act 2.0 Effective Changes to RMDs

The SECURE Act 2.0 of 2022 effectively establishes new ages for beginning the RMD. Starting this year through 2032, the age for eligibility to take the RMD is 73 years old. The SECURE Act 2.0 also increases the RMD start age to 75 years old, beginning in 2033. Anyone born on January 1, 1960 or later qualifies.

While a person who turned 72 in 2022 would evidently turn 73 in 2023, the original RMD for this account holder would not be discarded. Individuals that turned 72 in 2022 must satisfy their 2022 RMD by April 1, 2023. This same individual would then complete the 2023 RMD by December 31, 2023. If someone is born between January 1, 1951 and December 31, 1959, their RMD age is effectively 73 under the new rules. 2023 acts only as a transition year, and no account holder will take their initial RMD in 2023.

How the RMD Process Works

Below is an example of the RMD process in action.

An account holder turns 73 in 2024. As the 2024 RMD calculation is based on the account value as of December 31, 2023 and the IRS’s RMD table calculation, the 2024 RMD needs to be withdrawn from the account holder’s IRA by April 1, 2025. The first year, the account holder is given an extended window if they choose to defer. The individual’s 2025 RMD (December 31, 2024 value and IRS’s RMD table) will need to be completed by December 31, 2025.

Age Requirements/Birth Year for Required Minimum Distributions

RMD Age

• 70 ½
• 72
• 73
• 75

Birth Years

• Prior to and including June 30, 1949
• July 1, 1949 through December 31, 1950
• January 1, 1951 through December 31, 1959
• January 1, 1960 and beyond

Effective

• Original IRA rules
• SECURE Act (started 2020)
• SECURE Act 2.0 (Starts 2023)
• SECURE Act 2.0 (Starts 2033)

Tax Penalty Changes

With the enactment of the SECURE Act 2.0, changes were also made to the tax penalty of failing to complete an RMD withdrawal. The tax penalty was previously 50% of the amount of the distribution. The SECURE Act 2.0 reduced the penalty to 25%. Of note, the IRS has historically accommodated an account holder if they correct the mistake with a waiver after realizing the missed distribution. Now that the penalty is reduced, this leniency and forgiveness may not occur as often. If you missed taking or completing an RMD, please reach out to your tax professional for assistance.

Roth Employer Plan Account Changes

The SECURE Act 2.0 eliminates RMDs within Roth employer plan accounts starting on January 1, 2024. Currently, if an individual held a Roth 401(k) and was at the RMD age, that person would be required to withdraw funds. This requirement was eliminated starting in 2024. Roth employer accounts have its own set of rules compared to Roth IRA accounts, as Roth IRAs never had RMD requirements for the original account holder. Under SECURE 2.0, both accounts are treated the same with no RMD requirements starting in 2024.

The RMD changes are only a portion of the SECURE Act 2.0. To learn more about changes under the Act, please view our recent webinar or reach out to our team.