An overview of new 2023 RMD rules
The IRS will allow you to save tax deferred all throughout your career but at some point, you must begin withdrawals. For many years, that age was 70 ½. With the SECURE Act, the age increased to 72. With SECURE 2.0, the new 2023 RMD rules have changed that again to 73. In 2033, just so we don’t get too comfortable, that age will change again to 75. Required minimum distributions, or RMDs, are required from all types of retirement savings accounts, and there are stiff penalties for not taking one when you are supposed to.
If your savings are all in an IRA, SEP or SIMPLE IRA, you would start those withdrawals when you reach the current legal required age. If your savings are in a retirement plan, you may be able to delay that start date. The rules about start dates become more complex if you are the beneficiary of an IRA or a retirement plan and the original account holder has passed away. Once you achieve the appliable age, you must have a distribution by 12/31 of each year with an exception available for the initial year.
Let’s look at an example of how this would work in real life with the assumption that I turn 73 in 2024. If I have my money in an IRA, I must either take that distribution by 12/31/2024 or 4/1/2025. Now, if I have my money in a retirement plan, then I need to look at some other factors. Do I have ownership in my employer of more than 5%? If so, I must either take that distribution by 12/31/2024 or 4/1/2025. But if I am not an owner AND I am still employed, then I can elect to delay starting those distributions until I retire.
The new 2023 RMD rules are a little more complex if you are the beneficiary of an account. They are dependent upon whether the decedent has started taking those withdrawals and whether or not you are the surviving spouse. If you have questions on one of these situations, please consult with your IRA provider or your retirement plan provider for advice on the specifics involving your accounts.
Although your IRA provider or retirement plan provider may calculate the distribution for you, ultimately, you are responsible for making sure it is correct and distributed on time each year. For IRA holders, you must calculate the RMD for each account you have but you can aggregate them and take the distribution from only one IRA. For retirement plan accounts, you must calculate and distribute from each retirement plan you have an account balance in. The penalties for a missed RMD are assessed to the participant, not the IRA provider or the retirement plan. So, it is important to know when your start date is. The penalty for a missed RMD was 50% of the required withdrawal amount for years prior to 2023. Under the new 2023 RMD rules, the penalty is now 25% for 2023 and beyond. If the RMD is correctly removed within two years, the penalty can be decreased to 10%. To apply for a waiver, you must file Form 5329 and attach a letter of explanation.
RMDs will be taxed as ordinary income for the year of withdrawal. You can elect to have taxes withheld and paid from the IRA with your withdrawal. You will report the income on your federal tax return each year. Be advised that if you delay your first distribution until 4/1 of the next year, you will have TWO distributions that year that are taxable to you. You can take out more than the required amount as well. But you cannot use a distribution in excess of the RMD in one year to cover a shortfall in a future year. You cannot roll over amounts that are for your RMD into an IRA account. This is important to note when you are leaving an employer, you are of RMD age, and you have money in your retirement plan. Again, let’s see an example of how this would work in a real life situation. We will assume I’m 74 in this scenario and I have left my employer this year. I have delayed taking my RMDs but since I’m no longer employed, I have an RMD due either by 12/31 this year or 4/1 the next year of $40,000. I can roll over all of my account balance with the exception of the $40,000. I must take that portion as a cash distribution.
Another issue is how the distribution is calculated. The calculation is made on the account balance as of the last day the year BEFORE. So, in the first year it will be December 31 of the year before I turned 73. Each year thereafter, your RMD amount should be available to you in early January so you have plenty of time to plan on when to take that distribution during the following year. One nice perk for those individuals who have saved in a Roth vehicle, you will not have to include Roth amounts in your calculations.
RMDs are complicated. Be sure to reach out to your advisor with ML&R Wealth Management if you have questions on your specific situation. Retirement plan participants may reach out to email@example.com or 512-370-3296.