Required Minimum Distributions New Law: SECURE 2.0 Changes

Many retirement savers are familiar with 401(k) plans but may not be aware of the details involved in taking distributions from such plans. Understanding retirement savings distribution rules is essential for effective retirement planning and financial security during retirement. Required Minimum Distributions (RMDs) are minimum distributions that must be withdrawn annually from certain types of retirement accounts, such as 401(k) plan retirement accounts, beginning at an age or life event specified by the IRS. This post will discuss what you should know about RMDs, why the IRS requires them, and changes to the RMD rules under SECURE 2.0.

What are Required Minimum Distributions?

A Required Minimum Distribution (RMD) is the minimum amount that a retirement savings account owner must withdraw annually from an eligible retirement account starting the year that he or she turn age 73. The IRS enforces RMD rules and if you do not take an RMD when the rules require, you may incur an IRS penalty.

The amount of the RMD is dependent on your age and the balance of your retirement savings account. The financial institution that holds the retirement account, like Millennium Trust, will typically help you calculate your RMD amount.What types of retirement accounts require RMDs?

The RMD requirement applies to Traditional Individual Retirement Accounts (IRA) and IRA-based retirement plan accounts such as Simplified Employee Pension (SEP) IRAs and Savings Incentive Match Plan for Employees (SIMPLE) IRAs. The RMD requirement also applies to self-directed IRAs.

RMD rules do not apply to Roth IRAs while the account owner is alive.

The RMD rules also apply to all employer-sponsored retirement plans, including profit-sharing plans, 401(k) plans, 403(b) plans and 457(b) plans. Currently, RMDs are required from Roth 401(k) accounts however with the passing of SECURE 2.0 Act, RMDs will no longer be required from Roth 401(k) accounts, beginning January 1, 2024.

Note: If your employer-sponsored traditional retirement account was automatically rolled into a traditional IRA, RMD rules continue to apply to the rollover account.

Why does the IRS require RMD withdrawals?

Since you have not paid income tax on contributions to a traditional 401(k) retirement account or Traditional IRA, the IRS requires RMDs, so you eventually pay taxes owed on those pre-tax contributions. RMD rules also facilitate a retirement saver’s use of accumulated retirement funds during their retirement.

Required Minimum Distributions new law: SECURE 2.0 changes

The SECURE 2.0 Act of 2022 was signed into law on December 29, 2022 and includes a number of changes that affect RMDs. The RMD beginning age, penalties for failure to timely take an RMD and RMD account rules are changing in the following ways:

When do I need to take an RMD?

Effective in 2023, the age at which you must begin taking RMDs from traditional IRAs and workplace retirement plan accounts (such as 401(k)s) increased from 72 to 73. The RMD threshold age will increase again to 75 in 2033.

What happens if I do not take an RMD?

With the passing of SECURE 2.0, the penalty for not taking an RMD will decrease from 50% of the RMD amount not taken, to 25%. The penalty will be further reduced to 10% if an accountholder withdraws the RMD previously not taken and submits a corrected tax return within a certain timeframe.

How are workplace retirement plans impacted?

Beginning in 2024, if you have an employer sponsored retirement plan Roth account, you will no longer be required to take an RMD from that account during your lifetime. This RMD rule change for employer sponsored retirement plan Roth accounts now corresponds to the RMD rules already in place for Roth IRAs.

The RMD rule changes mentioned in this blog post are newly enacted, and limited guidance exists and is subject to change. As always, you should consult your financial and tax advisors for detailed information about any RMD requirement and how it relates to your particular situation.

Do you need to take an RMD from your Millennium Trust account? Complete this RMD form.

The material in this Blog is presented for informational purposes only. The information presented is not investment, legal, tax or compliance advice. Millennium Trust Company performs the duties of a directed custodian, and as such does not offer or sell investments or provide investment, legal or tax advice.