One of the most immediate impacts of the SECURE 2.0 Act of 2022 passed by Congress last Friday is raising the age for Required Minimum Distributions (RMDs) from retirement accounts including 401ks and IRAs from 72 to 73 beginning on Jan. 1, 2023.
Under the new legislation, the RMD age will remain at 73 for a decade before jumping up to age 75 in 2033.
That’s a big jump from just a few years ago, when the RMD age was 70½ before the original SECURE Act of 2019 bumped it to 72 starting in 2020.
In 2022, seniors must start taking RMDs from 401k accounts, traditional IRAs, and similar retirement savings accounts (other than Roth IRAs) in the year they turn 72 (although they have until April 1 of the following year to take their first RMD).
The policy behind the RMD age rule is to ensure that individuals spend their retirement savings during their lifetime and not use their retirement plans for estate planning purposes to transfer wealth to beneficiaries.
Before SECURE 2.0, failing to take a RMD could lead to one of the steepest penalties in the entire tax code, as missing a RMD or not taking a big enough RMD triggered a 50% excise tax on the distribution shortfall (although the IRS rarely enforced the penalty if the mistake was corrected in a timely manner). SECURE 2.0 reduces the penalty to 25% in all cases. In addition, the penalty drops down to 10% if the necessary RMD is taken by the end of the second year following the year it was due. These penalty-reduction provisions apply beginning in 2023.
Section 325 of SECURE 2.0 also removes pre-death RMDs from Roth accounts, like Roth 401ks and Roth 403b accounts. Moving forward, those accounts won’t be subject to the RMD rules before the account holder dies.
Section 201 of SECURE 2.0 boosts the use of qualified longevity annuity contracts (QLACs) in a way that can help reduce RMDs. Generally, with a QLAC, you can invest up to $130,000 (2022 amount) or 25% of a retirement account—whichever is less—and shield those funds from RMDs. SECURE 2.0 removes the 25% limit and bumps the dollar amount up to $200,000 (adjusted for inflation each year).
While SECURE 2.0 RMD changes generally help retirees by further delaying them and reducing taxes, plenty of complexity remains in determining RMDs.
SEE ALSO:
• What’s Behind ‘SECURE 2.0’ Provision to Boost RMD Age to 75?
• PASSED! SECURE 2.0 Awaits Biden’s Signature After $1.7T Spending Bill Clears House Friday
Veteran financial services industry journalist Brian Anderson joined 401(k) Specialist as Managing Editor in January 2019. He has led editorial content for a variety of well-known properties including Insurance Forums, Life Insurance Selling, National Underwriter Life & Health, and Senior Market Advisor. He has always maintained a focus on providing readers with timely, useful information intended to help them build their business.
