Required Minimum Distributions for Retirement Accounts
Posted by Robert Ingrasci on March 26, 2024
Once you reach a certain age, if you hold a tax-favored retirement account like a traditional IRA, you'll encounter the federal income tax required minimum distribution (RMD) rules. These regulations also apply if you inherit a tax-favored retirement account, whether it's a traditional or Roth IRA.
Here's what you need to know about the current rules, especially considering recent tax-law changes.
Understanding RMDs
RMD rules mandate annual withdrawals from tax-favored accounts, typically triggering federal and possibly state income tax bills, except for Roth IRA distributions that meet the tax-free criteria. While original Roth IRA account owners are exempt from RMD rules during their lifetime, inherited Roth IRAs are subject to different regulations.
Delayed Start for RMDs
The SECURE 2.0 law, enacted in 2022, raised the starting age for RMDs to 73 for account owners turning 72 from 2023 to 2032. For instance, if you reached age 72 in 2023, your initial RMD would be for calendar year 2024, due by April 1, 2025, to avoid penalties. The strategic move is to take your initial RMD for 2024 before the year-end 2024, followed by the second RMD for 2025 before December 31, 2025, to avoid a double tax hit.
Reduced Penalty
Previously, failing to withdraw the RMD amount incurred a hefty 50% penalty. SECURE 2.0 reduced this penalty to 25%, or 10% if the shortfall is withdrawn within a correction window.
Controversial 10-Year Liquidation Rule
Under the original SECURE Act, non-spouse IRA and retirement plan beneficiaries must deplete inherited accounts within 10 years after the account owner's death or face penalties. IRS proposed regulations in 2022 clarified that beneficiaries subject to the 10-year rule must take annual RMDs and empty the account by the end of the period. However, the requirement for annual RMDs during the 10-year period is debatable. The IRS, in Notice 2023-54, announced that beneficiaries who didn't take RMDs in 2023 won't face penalties. New final RMD regulations are expected in 2024.
Planning Ahead
While SECURE 2.0 brings positive changes to RMDs, the 10-year account liquidation rule introduced by the original SECURE Act remains complex. Further clarification is awaited. Stay informed about developments in RMD regulations.
SECURE 2.0 has some good effects on RMDs, but the 10-year account liquidation rule that came with the first SECURE Act is still complicated. More guidance is needed. Keep up to date with changes in RMD rules, and contact us if you have questions about retirement plans.
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Bob is an experienced tax professional who devotes his professional time to structuring tax strategies in the areas of compliance, consulting, and planning. Bob works closely with a broad range of high-net-worth individuals and multi-generational families, specializing in the areas of gift and estate planning, charitable gift planning, trust and estate administration, individual taxation, and wealth preservation. Bob serves as a practice leader in the Family Wealth and Estate Planning group. Bob joined Lumsden McCormick in 2008 and was named partner in 2022.