Learn about the recent changes in required minimum distributions and how they affect your loved ones.
Required minimum distributions (RMDs) are a critical component of retirement planning, ensuring that individuals withdraw a minimum amount from their retirement accounts annually. Recent legislative changes have altered the landscape of required minimum distributions, impacting when and how much retirees must withdraw.
This post explores the required minimum distribution changes, providing essential insights to help you navigate your retirement strategy effectively.
FAQs:
Q1: What is the new age for starting required minimum distributions?
A1: The new legislation has changed the starting age for required minimum distributions to 75, providing more time for account growth before mandatory withdrawals begin.
Q2: How do required minimum distribution changes affect Roth IRAs?
A2: Roth IRAs are generally not subject to required minimum distributions during the account owner’s lifetime, but changes in legislation can affect inherited Roth IRAs.
Q3: Can I delay my required minimum distributions?
A3: While you cannot delay required minimum distributions beyond the required starting age, strategic planning can help manage the timing and impact of withdrawals.
The Impact Of The Secure Act On Required Minimum Distribution Basics
The Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act) changed the rules for taking distributions from retirement accounts inherited after 2019. The so-called “10-year rule” generally requires inherited accounts to be emptied within 10 years of the original owner’s death, with some exceptions.
Where an exception applies, the entire account must generally be emptied within:
- 10 years of the beneficiary’s death, or
- 10 years after a minor child beneficiary reaches age 21.
This reduces the ability of most beneficiaries to spread out, or “stretch,” distributions from an inherited defined contribution plan or an IRA.
In 2022, the IRS issued proposed regulations that interpreted the revised required minimum distribution (RMD) rules. Final regulations have now been issued and are generally applicable starting in 2025.
They basically adopt the proposed regulations, while reflecting some changes made by the SECURE 2.0 Act of 2022 and including certain changes in response to comments received on the proposed regulations.
Under these regulations, some beneficiaries could be subject to annual required distributions as well as a full distribution at the end of a 10-year period.
Account owners and their beneficiaries should familiarize themselves with these changes and consider how they might be affected.
Required Minimum Distributions For The Account Owner
If you own an individual retirement account (IRA) or participate in an employer retirement plan like a 401(k), you generally must start taking RMDs for the year you reach your required minimum distribution age.
The required minimum distribution age is:
- 70½ (if born before July 1, 1949),
- 72 (if born July 1, 1949, through 1950),
- 73 (if born in 1951 to 1959), or
- 75 (if born in 1960 or later)
If you are still working for the employer that maintains the retirement plan, you may be able to wait until the year you retire to start RMDs from that account.
Failing to take a required minimum distribution can be costly: a 25% penalty tax (50% prior to 2023) generally applies to the extent a required minimum distribution is not made.
The required beginning date (RBD) for the first year you are required to take a lifetime distribution is no later than April 1 of the next year.
After your first distribution, annual distributions must be taken by the end of each year.
If you wait until April 1 to take your first-year distribution, you would have to take two distributions for that year: one by April 1 and the other by December 31.
Lifetime distributions are not required from Roth accounts and, as a result, Roth account owners are always treated as dying before their RBD.
Prior to 2024, these two special rules for Roth accounts applied to Roth IRAs, but not to Roth employer retirement plans.
Required Minimum Distributions For Beneficiaries
When you die, the required minimum distribution rules also govern how quickly your retirement plan or IRA will need to be distributed to your beneficiaries.
The rules are largely based on two factors:
- the individuals you select as beneficiaries of your retirement plan, and
- whether you pass away before or on or after your RBD.
The SECURE Act still allows certain beneficiaries to “stretch” distributions, at least to some extent.
Who Is Subject To The 10-Year Rule Regarding Required Minimum Distributions?
The SECURE Act still allows certain beneficiaries to “stretch” distributions, at least to some extent.
These eligible designated beneficiaries (EDBs) include:
- your surviving spouse,
- your minor children,
- the individuals you select as beneficiaries of your retirement plan, and
- whether you pass away before or on or after your RBD.
Generally, eligible designated beneficiaries are able to take annual required distributions based on remaining life expectancy.
However, once an eligible designated beneficiary dies, or once a minor child eligible designated beneficiary reaches age 21, any remaining funds must be distributed within 10 years.
Importantly, the SECURE Act requires that if your designated beneficiary is not an eligible designated beneficiary, the entire account must be fully distributed within 10 years after your death.
Relief For Certain Required Minimum Distributions From Inherited Retirement Accounts
The IRS has announced that it will not assert the penalty tax in certain circumstances where individuals affected by the required minimum distribution changes failed to take annual distributions in 2024 during one of the 10-year periods.
Similar relief was previously provided for 2021, 2022, and 2023
For example:
- Relief may be available if the IRA owner or employee died in 2020-23 and on or after their RBD and the designated beneficiary who is not an eligible designated beneficiary did not take annual distributions for 2021-24 as required (during the 10-year period following the IRA owner’s or employee’s death).
- Relief might also be available if an eligible designated beneficiary died in 2020, 2021, 2022, or 2023 and annual distributions were not taken in 2021, 2022, 2023, or 2024 as required (during the 10-year period following the eligible designated beneficiary’s death).
The rules relating to required minimum distributions are complicated, and the consequences of making a mistake can be severe. Staying informed about the changes in required minimum distributions is crucial for effective retirement planning. By understanding the new rules and implementing strategic adjustments, you can optimize your financial future and ensure compliance with IRS regulations.
Contact your tax and financial advisors to determine the best moves for your situation.