What You Need To Know About Changes To Your Required Minimum Distribution (RMD)

Our government recently passed an update to rules regarding RMDs as part of the Secure 2.0 Act. This could be a big change for you.

RMD stands for Required Minimum Distribution, which is the minimum amount that individuals must withdraw annually from their tax-deferred retirement accounts. These accounts include traditional IRA’s, 401(k)s, 403b’s, 457 plans and defined benefit plans, collectively referred to as “tax-qualified plans”.

The goal of RMDs is to ensure that individuals begin using their retirement savings as intended during their retirement years and, probably the real reason, get the money back into taxable circulation. Being aware of your RMDs is an important aspect of retirement planning as it can have a significant impact on your taxable income and tax bracket.

What Changed With The Secure 2.0 Act?

Starting in 2023, here are the new ages at which individuals are required to start taking distributions from tax-qualified retirement accounts. See the chart below for more info. 

  • Starting January 1, 2023 you are required to start taking distributions in the year you turn 73. 
  • Starting January 1, 2033 you are required to start taking distributions in the year you turn 75. 

Beginning in 2024, Roth designated accounts in an employer retirement plan (401(k) plans), will be exempt from required minimum distribution rules while the account owner is alive. This means that individuals will not be required to take distributions from their Roth 401(k) accounts ever, bringing the Roth 401(k) in line with the Roth IRA.

It’s important to note that this change would not affect beneficiaries of inherited Roth 401(k) plans, who would still be subject to RMD rules.

Most Notable changes of the Secure 2.0 Act: 

  • Starting Age: 72 to 75
  • Years in effect: Beginning in 2023
  • Penalty: Reduced from 50% to 25%. (10% if corrected in the first 2 years) 
  • Grace period: 2 years

The tax penalty for failing to take a required minimum distribution (RMD) will be reduced from 50% to 25% of the RMD amount. You can even get your penalty further reduced to 10% if you correct it within a two-year window. The reduction of the penalty to 25% or 10% is a welcome change for those who make an honest mistake.

Another change in the law is that spousal beneficiaries of employer-provided plan benefits will be able to elect to be treated as employees for the purposes of required minimum distributions. This would allow the spouse to use their own life expectancy to calculate their RMDs, instead of being forced to use the life expectancy of the plan participant.

Additionally, if the spouse is the sole designated beneficiary, the distribution rate will be determined based on a uniform life table. This would provide more favorable distribution rates for the beneficiaries and allow them to keep more of the funds in the account for a longer period of time.

It’s worth noting that these changes provide additional flexibility and relief for individuals and beneficiaries of employer-provided plans, allowing them to keep more of their money invested for a longer period of time and potentially grow their retirement savings. However, it’s important to consult with a financial advisor or tax professional to understand how these changes may affect your specific situation.

How This Impacts Your Retirement Planning 

One of the main benefits of RMD changes is the ability for individuals to leave more money in their retirement accounts for longer periods of time, potentially leading to greater growth of their retirement savings. This can help individuals achieve their retirement goals, such as traveling, moving, or just having enough money to last throughout their retirement years.

Another benefit of the changes is the temporary suspension of RMDs for 2020 and 2021. This provided relief for individuals who were required to take RMDs during a period of market downturn caused by the COVID-19 pandemic. Many individuals may have seen the value of their retirement accounts decrease during this time, and the suspension of RMDs allowed them to avoid having to sell investments at a loss.

However, there are also potential drawbacks to the RMD changes. One of the main cons is that the changes may have negative tax implications for individuals. For example, if individuals are not required to take RMDs, they may be in a higher tax bracket in the future, which could result in paying more taxes on their withdrawals. Additionally, if individuals do not take RMDs and their accounts continue to grow, they may end up with a larger RMD in the future, which could result in a loss of benefits reserved for retirees with a sufficiently low income.

What Does It All Come Down To?

RMDs are changing and this could have a huge impact on your retirement. It’s best to talk to a financial planner so you can accommodate these changes in your retirement plan.

When planning for retirement, it is important for individuals to consider a variety of factors in addition to their retirement accounts, such as Social Security, pensions, and other sources of income.

For individuals who are currently planning for retirement or are retired, there are several tax-qualified account tips to consider:

  1. Take advantage of catch-up contributions: Individuals over the age of 50 are eligible to make catch-up contributions to their qualified retirement plan accounts, which can help them save more for retirement.
  2. Consider non-workplace tax-advantaged accounts: Roth IRAs and Traditional IRAs are both tax-advantaged accounts that can be a great way to save for retirement. Understanding the differences and tax implications between the two accounts and their workplace counterparts can help you make the best decision for your retirement savings.
  3. Monitor your investments: As you get closer to retirement, it’s important to review your investment portfolio and make sure it’s properly diversified and aligned with your retirement goals.
  4. Review your beneficiaries: Review your beneficiaries and make sure they are up to date, as this will ensure that your wealth goes to the people and causes you want in the event of your death.
  5. Consider working with a financial advisor: A financial advisor can help you navigate the complex landscape of retirement planning and ensure that you’re on track to achieve your retirement goals.

Working with a financial advisor can help individuals make informed decisions and create a comprehensive retirement plan that takes all of these factors into account.

And if you have any questions about anything finance-related, or could use some help taking advantage of a tax qualified account, reach out!

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