New RMD Rules for 2023
Under the SECURE 2.0 Act signed into law in December 2022, there are several new rules that affect required minimum distributions (RMDs) from traditional Individual Retirement Accounts (IRAs), 401(k)s and other tax-deferred retirement accounts. These changes, which build on the SECURE Act of 2019, are a benefit to retirees because they increase the RMD age and lower the penalty for failing to take a withdrawal. Here is what you should know.
New RMD Rules
As of January 1, 2023, the SECURE 2.0 Act increased the age for starting RMDs from 72 to 73. This is applicable to individuals turning 72 on or after January 1, 2023. In 2033, the starting age increases again to age 75. This change means that if you turn 72 on or after 2023, you can delay your RMDs one more year, allowing the funds in these accounts to grow tax-free for longer.
At age 73, you must start taking annual RMDs from the tax-deferred retirement accounts you own – traditional IRAs, SEP IRAs, SIMPLE IRAs, 401(k)s, 403(b)s and 457(b)s – and pay taxes on those withdrawals. Distributions are taxed as ordinary income based on your tax bracket.
There are, however, a few exceptions to the RMD requirement. Owners of Roth IRAs are not required to take a distribution unless the Roth IRA is inherited. Beginning in 2024, Roth RMDs will not be required for any Roth IRAs.
Furthermore, if you participate in a workplace retirement plan, work beyond age 73 and do not own 5% or more of the company, you can delay RMDs from a workplace retirement plan until the year you retire. However, if you have other non-work-related accounts, such as a traditional IRA or a 401(k) from a previous employer, you are still required to take RMDs from those accounts after age 73, even if you are still working.
Deadlines and Penalties
Generally, you must take your distribution every year by December 31 in order to avoid penalties. You can choose to delay taking your first distribution until April 1 of the year following the year you turn 73. Be cautious when delaying the first distribution, as it may push you into a higher tax bracket since the next distribution is to be made by December 31 of the same year.
Also, note that while you can always withdraw more than the required amount, you should not take less than the required amount. If you do not take out the minimum, you will be assessed with a 25% penalty (lowered from 50%) on the amount that you failed to withdraw along with the income tax you owe on it. This penalty drops to 10% if you take the necessary RMD by the end of the second year following the year it was due. Account owners should consult with their tax professionals for the required tax forms to be filed for the years in which the RMDs were required but not taken.
Your RMD is calculated by dividing your tax-deferred retirement account balance as of December 31 of the previous year by an Internal Revenue Service (IRS) estimate of your life expectancy. A special rule applies if your spouse is the beneficiary and is more than 10 years younger than you.
IRA withdrawals must be calculated for each IRA you own, but you can withdraw the money from any IRA or combination of IRAs. 403(b) account totals may also be combined with IRAs for RMDs taken from any account or combination of accounts.
With 401(k) and 457(b) plans, however, you must calculate the RMD for each plan and withdraw the appropriate amount from each account. To calculate your RMD, you can use the worksheets on the IRS website, IRS.gov/Retirement-Plans and click on "Required Minimum Distributions." Alternatively, contact your IRA custodian or retirement-plan administrator who can do the calculations for you.
For more information, see the "Distributions from Individual Retirement Arrangements" (publication 590-B) at IRS.gov/pub/irs-pdf/p590b.pdf.
Savvy Living is written by Jim Miller, a regular contributor to the NBC Today Show and author of "The Savvy Living" book. Any links in this article are offered as a service and there is no endorsement of any product. These articles are offered as a helpful and informative service to our friends and may not always reflect this organization's official position on some topics. Jim invites you to send your senior questions to: Savvy Living, P.O. Box 5443, Norman, OK 73070.