Unfortunately, the IRS does not allow most retirement savers to keep funds in their account indefinitely. One must generally start taking annual withdrawals from your pretax IRA, Self-Directed IRA, SEP, SIMPLE, 401(k) or similar retirement plan account(s) by age 73, the new required minimum distribution (RMD) age starting in 2023. Note – a Roth IRA is not subject to the RMD rules, but a non-spousal Roth beneficiary would be. In addition, a surviving spouse that is the sole beneficiary of a deceased spouse’s IRA can put the IRA in his or her name and would not be subject to the RMD rules. Hence, the RMD rules discussed in this article are essentially only for non-spousal inherited IRAs.
This article will explore the new 2023 RMD rules and how they impact us all. In addition, it will detail how the current RMD rules apply.
The New 2023 RMD Rules
In late December 2022, President Biden signed into law the $1.7 trillion spending bill. As part of the bill, there is a set of 90 or so provisions that apply to retirement accounts. These retirement-related provisions are known as SECURE Act 2.0.
Section 107 of the Act increased the age for Required Beginning Date (RBD) for mandatory IRA and 401(k) distributions. Under 2022 law, participants are generally required to begin taking distributions from their retirement plans at age 72. The policy behind this 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. The original SECURE Act increased the required minimum distribution age to 72 (up from 70 1/2). Section 107 further increases the RBD to 73 beginning on January 1, 2023 – and increases the age further to 75 starting on January 1, 2033.
The RMD amount is basically the minimum amount you must withdraw from your account each year.
- One can withdraw more than the RMD amount.
- RMD amounts are treated as taxable income except for any part that was taxed before (your basis) or that can be received tax-free (such as qualified distributions from designated Roth accounts).
Required Beginning Date for Your First RMD
You are required to take your first RMD on April 1 of the year following the calendar year in which you reach age 73. Every year thereafter, you must take your required distribution by December 31.
Keep in mind that your distribution is taxable during the year in which it is taken. If you put off your first distribution until the following year, you will be taxed on both your first (due April 1) and second (due December 31) minimum distributions. Depending on you situation, it may make sense to not wait to take your first RMD. Taking it before the end of the year would allow the distributions to be included in your income in separate tax years giving you the opportunity to spread out the tax burden.
How to Calculate your RMD
As per the IRS, the “RMD is calculated for each account by dividing the prior December 31 balance of that IRA or retirement plan account by a life expectancy factor that the IRS publishes. Choose the life expectancy table to use based on your situation.”
One may use a different table if the sole beneficiary is the owner’s spouse who is ten or more years younger than the owner. The following is a few helpful tips to determine how to calculate your RMD:
- Uniform Lifetime Table – for all unmarried IRA owners calculating their own withdrawals, married owners whose spouses aren’t more than 10 years younger, and married owners whose spouses aren’t the sole beneficiaries of their IRAs.
- Table I (Single Life Expectancy) is used for beneficiaries who are not the spouse of the IRA owner.
- Table II (Joint Life and Last Survivor Expectancy) is used for owners whose spouses are more than 10 years younger and are the IRA’s sole beneficiaries
Note that RMDs should be calculated separately from each plan you own. If you have multiple IRAs, the total aggregate amount of the RMDs can be withdrawn from one or more of your IRAs. The same is true if you have multiple 403(b) plans. However, if you have another type of retirement plan, such as a 401(k) or 457(b), RMDs must be taken separately from each account.
IRS RMD Regulations & More Confusion
Under current RMD rules, RMD distribution of a deceased IRA owner had to follow one of two rules, depending on whether the deceased owner died before or after the RBD. If the participant died after the RBD, the beneficiary had to receive payments at least as rapidly as the participant had been receiving them. If the participant died before the RBD, the benefit had to be distributed within five years of the participant’s date of death; alternatively, the plan could allow payments to stretch over a period not exceeding the designated beneficiary’s life expectancy.
Whereas, under SECURE Act 1.0, the stretch IRA was eliminated and all RMD withdrawals would have to be taken over a 10-year period. The IRS then added a layer of confusion to the 10-year rule by releasing proposed Treasury Regulations which added more rules as to when the RMDs were required to be taken over a ten-year period based on when the deceased IRA owner died. Considering the confusion and vocal criticism by the retirement industry, IRS Notice 2022-53 held that the RMD regulations would not apply before 2023. Thus, expect more clarity on the 10-year RMD rules later this year.
Reduced Penalties for Failure to take a Timely RMD
Section 302 of SECURE Act 2.0, reduced the excise tax on certain accumulations in qualified retirement plans. It reduces the penalty for failure to take RMDs from 50 percent to 25 percent. Further, if a failure to take an RMD from an IRA is corrected in a timely manner, as defined under the Act, the excise tax on the failure is further reduced from 25 percent to 10 percent. Section 302 is effective for taxable years beginning after the date of enactment of this Act, which is 2023.
The original SECURE Act was supposed to simplify the RMD rules by making all RMDs, essentially, a 10-year rule for non-spouse inherited IRAs. For spousal IRAs, if the surviving spouse is the sole beneficiary of the IRA, then the surviving spouse can become the owner of the IRA and the RMD rules would not apply. Whereas, in the case of a non-spousal IRA beneficiary, the 10-year rule proposed in the Act and the Proposed IRS Treasury regulations are still not law.
In 2023, current RMD participants are still subject to the RMD calculation rules under the Uniform Lifetime Table, Single Life Expectancy Table, or the Joint Life and Last Survivor Expectancy Table, as applicable. It’s important to keep in mind when RMDs are supposed to start (age 73) and when they are due (either April 1 of the following year after reaching age 73 or December 31 for every year beginning at age 74). Failure to withdraw the required amount will lead to penalties, and no one wants that!