What are RMD Rules for 2023?

After a certain age, retirement account owners must take minimum distributions from traditional IRAs and 401(k)s. The SECURE 2.0 Act has changed the rules, reports the article “New RMD Rules for 2023” from U.S. News & World Report.

Before the SECURE 2.0 Act, the age to start RMDs was 72 for retirement accounts, including traditional IRAs and 401(k)s. Now, the RMD age has increased in two steps. Beginning in 2023, the RMD age will increase to 73, and in 2033, the RMD age will increase to 75. If you were born between 1951 and 1959, you’d need to start RMDs after age 73. Were you born after 1960? You can delay RMDs until after age 75.

There are important deadlines, and while you get extra time to take your first RMD, you must take subsequent RMDs every calendar year.

Here’s the twist: remember, RMDs are taxable. If you take your first RMD in 2023 because you celebrate your 72^nd birthday that year, you’ll have some decisions to make. You can take the RMD by December 31, 2024, or delay it until April 1, 2025. But if you wait until April 2025, you’ll take two RMDs in one tax year.

If your income from Social Security and other sources is more than you need, those higher ages for RMDs have their advantages. Retirement savings accounts may grow tax-free for a more extended period. The change may also bring savings in Medicare costs. The price of Medicare premiums is tied to income. When retirees take distributions from pre-tax retirement accounts, it increases their income and their premiums. By waiting on withdrawals, you can lower your income, leading to lower Medicare premiums at that time.

However, the delay in taking distributions may also lead to higher taxes during later stages of retirement. If you don’t withdraw funds early, you may have higher RMDs later, leading to larger tax bills.

Account owners who don’t take an RMD at the right time usually face harsh penalties. Before the SECURE 2.0 Act, the tax penalty was 50% on the required amount not withdrawn. Now the penalty is 25%. If the mistake is corrected quickly, the penalty can decline to 10%, as long as the person can demonstrate the missed RMD was due to an error and reasonable steps are being taken to resolve the issue.

There are changes to qualified charitable distributions as well. Account owners aged 70 ½ and older may now make IRA-qualified charitable distributions of up to $100,000 per year without owing income tax on the transaction, which can count as their yearly RMD. The qualified charitable distribution limit is now linked to inflation and may increase in future years. A one-time gift of $50,000 may be made directly to an eligible entity through a charitable gift annuity, a charitable remainder unitrust, or a charitable remainder annuity trust.

Based on the SECURE Act 2.0, Roth 401(k) account owners no longer have to take RMDs. This aligns the Roth 401(k) with Roth IRAs, which also do not require any distributions in retirement.

Reference: U.S. News & World Report (Feb. 10, 2023) “New RMD Rules for 2023”