RMD Rules

New RMD Rules in 2023

The rules for Required Minimum Distributions (RMDs) have gone through changes in recent years. If you want the RMD rules 2023 read on to learn more.

Required Minimum Distributions (RMDs) are the minimum amounts a retirement plan account owner must take out each year beginning when they reach a certain age. Whether you need it or not, the IRS requires individuals who reached a certain age to begin take out the correct RMD amount from their retirement account each year. Failing to do so can result in penalties. However, as the name indicates, this is only the minimum amount – the retirement plan account holder can withdraw more if needed.

 

What age should I start taking out RMDs in 2023?

Currently, when a retired person reaches age 73, they are required start taking RMD out of their retirement plan. Before January 1, 2023, however, the age requirement was 72 and before January 1, 2020, it was 70½. The RMD may also be deferred to the year in which a person retires if the individual is still actively working at age 73 and beyond.

RMD rules apply to all profit-sharing plans, 401(k) plans (including Roth 401(k) plans), 403(b) plans, 457(b) plans, traditional IRAs, SEP IRAs, SARSEPs, and SIMPLE IRAs.

It is important to note that there are exceptions to these rules. In the case of an IRA or where a person is a 5 percent owner of the business that sponsored a retirement plan, the RMDs will start at age 73 with no option to defer RMDs to a later age, even if the individual is still working. Roth IRAs, on the other hand, are presently excluded from the RMD requirement while the account owner is still alive.

 

Changes in RMD Rules

Unfortunately, the IRS says you can’t keep amounts in your traditional retirement accounts indefinitely, even if you don’t need the income. However, there have been some recent changes that allow you to hang on to your retirement saving longer.

The Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act) increased the RMD age from 70½ to 72. With the SECURE Act 2.0 now signed and put into effect, the beginning age has further been delayed to 73. In 2033, the RMD age will be raised to 75.

 

As mentioned earlier, it is the responsibility of the individual to take out the correct RMD for their retirement plan account when they reach the age 73 (or 70½). Not doing so or taking out less than the RMD for a particular year can result in becoming subject to excise tax on the amount you didn’t take out but were required to withdraw. With the SECURE 2.0 Act, the penalty has gone down to 25% from the previous rate of 50%, and can be lowered further to 10% if you take out the necessary RMD amount by the end of the following year.

The amount of the RMD is calculated for each retirement account by dividing the account’s balance as of December 31 of the prior year by a life expectancy factor outlined in IRS tables. While many retirement administrators or plan managers can help you with these calculations, you should also try to understand on your own what you are required to withdraw, as you are ultimately responsible for any penalties or taxes that you may incur for incorrect withdrawals.

In some circumstances, if you made an error in calculations but are in the process of taking corrective action, you may be able to request a waiver of the excise taxes.

Upon a person’s death, there are special rules regarding how the remaining funds must be distributed to beneficiaries. The SECURE Act changed the RMD rules regarding how quickly beneficiaries must receive retirement benefits upon the account owner’s death. These new rules will apply to persons who passed away after December 31, 2019.

Before the SECURE Act, RMD rules required distributions after a person’s death to be made in one of two ways. If the owner died before RMD rules applied to them, their interest had to be distributed as follows:

  1. within five years of their death, or
  2. over the life or life expectancy of the beneficiary, with distributions beginning no later than one year after the date of the owner’s death (subject to an exception for a surviving spouse).

If the owner died after the RMD applied to them, the beneficiary had to receive payments at least as quickly as the owner had been receiving them.

The SECURE Act has changed these RMD rules in several ways:

  1. It lengthens the five-year rule to 10 years.
  2. The new 10-year rule applies regardless of whether the owner dies before the required RMD beginning date.
  3. The option to distribute the retirement funds over the life or life expectancy of the beneficiary applies only to specific qualifying persons.
  4. For a beneficiary who is a minor at the date of death, the 10 years begin to run when that child reaches the age of majority.
  5. For persons who paid excise taxes for insufficient RMDs for 2021 and 2022, they may be able to request a refund.

The IRS has also stated it will not assert that an excise tax is due for persons who did not take an RMD under the prior rules for 2021 and 2022. The IRS final regulations related to these changes will not apply sooner than 2023.

The changes to these RMD rules are complex, and there are more details not fully covered by this article. If you have questions about RMDs and how they may affect you, consult the Law Office of Antoinette Bone to gain a better understanding of the possible impacts on your Estate Plan.

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