The New Age of RMDs
Wealth is always in formation and the quality of the information you receive and act upon, determines your long-term success: that’s especially true as it relates to Requred Minimum Distributions.
As part of our regular review process with clients, we discuss RMD’s, how they can be planned for, potentially minimized, and how to take the distribution if you are subject to one this year. RMD’s apply to pre-tax retirement accounts (with few exceptions) and certain beneficiary IRAs (including Roth). You’ll want to be attentive to these IRS rules because there is a penalty for not taking an RMD, 25% of what you did not take! That means that, if you were supposed to have taken $25,000 as an RMD in a given year and failed to do so, your penalty would be $6,250! If the error is corrected in a reasonable and timely manner, it may be reduced to 10%. That would still be $2,500!
RMD’s used to be more straight forward, but thanks to the SECURE Act passed in late 2019, the rules are anything but simple. Then, with the CARES Act in 2020, the RMD requirement for that year was waived. The rule went back into full swing in 2021, and there were even more new rules enacted with 2022’s omnibus bill that included the Secure Act 2.0, so here is a bit of a refresher on how the applicable age has changed, and changed again.
The SECURE Act of 2019 increased the RMD beginning age (known as the Required Beginning Date) for IRA owners from 70 ½ to 72. That means an IRA owner who reached 70 ½ by 12/31/2019 (those born 06/30/1949 or earlier) must have begun RMDs for the year he or she reached age 70 ½ and continue RMD’s for every year thereafter, with the exception of 2020, because RMDs were waived due to Covid 19. IRA owners who reached age 70 ½ after 12/31/2019 must have begun RMDs for the year they reached age 72. If you were born 1950 and after, you would not have been subject to RMDs for 2021 because you would not have reached age 70 ½ by 12/31/2019 and you would be under age 72 as of 12/31/2021. Then, with the Secure Act 2.0, the RMD age changed again starting in 2023, to age 73. Interestingly enough, that meant that no one was newly subject to RMDs on their own retirement accounts in 2023, because a 73-year-old in 2023 would have been 72 in 2022 and subject to RMDs. A new 72-year-old in 2023 had another year to delay, thanks to the 2022 Congress.
These RMD ages apply to your own pre-tax retirement accounts. The Secure Act 2.0 changed rules that apply to 401(k)s, and since 2024, RMDs will no longer be required in designated Roth accounts.
Roth IRAs held by the original account contributor have never been subject to RMD’s. Non-spouse beneficiary IRAs are subject to RMDs at any age of the inheritor and the rules differ depending upon whether the previous owner passed away prior to, during or later than 2020 and the rules are also different if the owner had passed his or her Required Beginning Date at the time of their death. Wealth is always in formation: Welcome to the new age of RMDs.
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
Securities and advisory services offered through LPL Financial, a registered investment advisor. Member FINR/SIPC
