The SECURE Acts—both the 2019 and 2022 versions—greatly affected how investors save for retirement and how long their savings can grow tax deferred. While mostly advantageous, the laws can still be confusing.
One area that has significantly changed and that all investors will eventually face is required minimum distributions (RMDs). While the government allows tax-advantaged retirement savings accounts, once investors reach a specified age, they are required to withdraw a minimum amount from traditional IRAs, SEP IRAs, SIMPLE IRAs, 401(k)s, and the like.
Before the legislation, the RMD age was set at 70 ½ for more than 30 years. Not surprisingly, the SECURE Acts changing this age requirement is big news; however, the age requirement is different depending on when the account owner was born. Those born before July 1, 1949, fall under the 70 ½ rule and are most likely already taking RMDs annually. Investors born between July 1, 1949, through 1950 began their RMDs at age 72. Those born between 1951 and 1959 can likely wait until age 73 before taking RMDs. Finally, assuming rules do not change again, those born in 1960 and later should be able to wait until age 75 before they must withdraw from their retirement accounts.
Just because investors can push off RMDs with the new age requirements doesn’t mean they should. Investors will want to consider their tax brackets, tax filing status, if their spouse is taking RMDs, and possibly their capacity to convert Traditional IRA funds to Roth IRAs when planning their mandatory withdrawals.
One welcome change to RMDs among all investors is the reduced penalty for insufficient withdrawals. While still steep at 25% of the amount not taken, it’s considerably better than the draconian 50% penalty investors once faced. Furthermore, the 2022 Act established a two-year period to correct a failure to take a timely RMD distribution with the statute of limitations beginning when the investor files their Form 1040 for the year the insufficient withdrawal was made. Correction of the withdrawal amount during this window will further reduce the penalty to 10% of the amount not withdrawn.
While investors likely rolled Roth employer plan accounts into Roth IRAs when they retired or separated from the company, those who remained in their employer plans to take advantage of proprietary investments or other benefits were required to begin withdrawals upon reaching RMD age. In 2024, investors who participate in Roth 401(k)s or Roth 403(b)s are no longer required to take distributions from these accounts once they reach RMD age.
A lesser-known change yet equally significant is that beginning in 2024, spouses who are sole beneficiaries of an employer plan can be treated as if it was theirs, provided the employee had not started mandatory distributions. This includes the option to delay the start of RMDs until either the original owner or surviving spouse reach RMD age, whichever is more beneficial. This provision is similar to a spouse inheriting an IRA who elects to treat the account as if it were their own.
The SECURE Acts’ changes to RMDs are just a limited portion of the overall changes the laws enacted. If you have questions on how the SECURE Acts impact your retirement planning strategies, the experts at Henssler Financial will be glad to help:
- Experts Request Form
- Email: experts@henssler.com
- Phone: 770-429-9166
Listen to the March 4, 2023 “Henssler Money Talks” episode.
This article is for demonstrative and academic purposes and is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
