Even if you aren’t yet in your 70s, or even retired, you’ve likely heard of required minimum distributions (RMDs). At a certain point, you’ll be required to take RMDs — annual withdrawals of specified amounts from your IRA, 401(k), SEP or SIMPLE plans. The timing for taking RMDs has changed since the SECURE 2.0 Act became law in 2020. That law enables retirement account holders to invest their funds for longer (and potentially earn more) and even reduces penalties for noncompliance. Let’s take a look.
Then and now
Before recent legislation, you had to begin taking RMDs by April 1 of the year following the year in which you turned age 70½. Starting in 2020, the initial Setting Every Community Up for Retirement Enhancement (SECURE Act) changed the threshold to age 72.
SECURE 2.0 went one step further. Beginning in 2023, the threshold increased to age 73, giving account holders the ability to defer their first withdrawal until April 1 of the following year. However, if you decide to defer your first RMD, you’ll need to take two RMDs the following year. So if you turned age 73 in 2024 and waited to take your first RMD until March 2025, you’ll still need to take another RMD by December 31, 2025. You must take RMDs regardless of whether you’ve retired from work.
The amount of an RMD depends on the value of the account at the end of the prior tax year. Therefore, your RMDs for the 2025 tax year are based on the amounts in your accounts on December 31, 2024, even though the calculation is based on your age at the end of the current year. Whether an account’s value has increased or declined since then doesn’t affect the RMD amount. If you own more than one qualified account, you must calculate the appropriate RMD for each one. The total amount for all noninherited IRA, SEP and SIMPLE accounts can be taken from one or more of them so long as you withdraw the full combined amount.
If you’re the owner of at least 5% of the business sponsoring your retirement plan, special rules apply. Discuss them with your financial advisor.
Penalties aren’t as stringent
What happens if you fail to take RMDs in a timely fashion? The IRS may impose a hefty penalty. But SECURE 2.0 provides some relief here, too.
Under earlier laws, the noncompliance penalty was equal to a staggering 50% of the RMD amount — the difference between the required withdrawal and the amount actually withdrawn.For example, if you failed to take a $10,000 RMD on time, the penalty was $5,000 (on top of any regular income tax).
Now, the penalty is equal to 25% of the difference. And the IRS can reduce it to 10% if you correct your error within two years. It’s also important to note that Roth IRA and Roth 401(k) accounts aren’t subject to RMDs or RMD-related tax penalties.
Eligibility rules change again
Although the eligibility age for taking RMDs just changed, the threshold shifts again in 2033, when retirees won’t need to take initial RMDs until they turn age 75. This will affect people currently in their mid-60s. If that’s you, start planning now by discussing retirement income strategies with your tax and financial advisors.
CRN202807-8952747