The IRS sent a (pretty) thorough reminder to subscribers about Required Minimum Distributions (RMDs) from retirement plans for those aged 73 and older.  It also discussed some changes introduced by the SECURE 2.0 Act.  Although we generally defer RMD guidance to retirement specialists—financial advisors and account trustees,  we want impacted readers to know enough to ask about the changes.

The most significant change caused by Secure Act 2.0 concerns inherited IRAs for non-spousal beneficiaries. Final regulations regarding these changes were recently released, but rather than spending a day writing (which means writing and rewriting) about these changes, this link to a recent CNBC (not an endorsement) article will hit the main points.

Below is the mentioned (lightly edited) IRS reminder discussing REMs as well as recent changes to distribution rules: 

RMD REMINDER AND RECENT CHANGES

Required Minimum Distributions (RMDs) are amounts many retirement plans and IRA account owners must withdraw annually. These withdrawals are taxable income and may incur penalties if not taken on time. The IRS.gov Retirement Plan and IRA Required Minimum Distributions FAQs webpage provides detailed information regarding the new provisions in the law. 

SECURE 2.0 Act: The new law raised the age at which account owners must begin taking RMDs while eliminating RMDs for Designated Roth accounts in 401(k) and 403(b) retirement plans. 

The minimum distribution rules generally apply to original account holders and their beneficiaries in these types of plans: 

• IRAs: IRA withdrawals from traditional IRAs and IRA-based plans occur every year once people reach age 73, even if they’re still employed.
• Retirement plans: The RMD rules apply to employer-sponsored plans, with delays allowed until retirement unless the participants own more than 5% of the sponsoring business.
• Roth IRAs: Roth IRA owners are not required to withdraw during their lifetime, however beneficiaries are subject to the RMD rules after the account owner’s death.  

Designated Roth accounts in a 401(k) or 403(b) plan will not be subject to the RMD rules while the account owner is still alive for 2024. This RMD Comparison Chart outlines key RMD rules and defined contribution plans for IRAs. 

Penalties for missed distributions

If an account owner fails to withdraw the RMD amount by the due date, the owner is subject to a 25% excise tax on the amount not withdrawn. If the error is corrected within two years, the 25% excise tax rate is reduced to 10%.  [Brett Note: One-off oversights can often have the penalty abated] 

RMD calculations

IRA trustees or plan administrators must either report the RMD amount to the account owner or offer to calculate it. Each IRA plan’s RMD must be calculated separately. However, owners can withdraw the total amount from one or more accounts of their choice as long as the annual requirement is met.   An IRA trustee or plan administrator may calculate the RMD, but the account owner is ultimately responsible for ensuring the correct RMD is taken. The IRS provides required minimum distribution worksheets to help calculate the RMD amounts and payout periods. 

Account owners should file Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts, with their federal tax return for the year the full amount of the RMD was required but not taken. 

Inherited IRAs  

Beneficiaries of inherited IRAs, retirement plan accounts, or Roth IRAs may be required to take RMDs. For guidance on taking RMDs from an inherited account and reporting taxable distributions as part of gross income, refer to Retirement Topics - Beneficiary and Required Minimum Distributions for IRA Beneficiaries. Help for those in charge of the estate to complete and file federal income tax returns can be found in Publication 559, Survivors, Executors, and Administrators. The factors that affect the distribution requirements for inherited retirement plan accounts and IRAs include: 

• Whether the account owner died after 2019, as the SECURE Act introduced new RMD rules for beneficiaries in these cases.
• The beneficiary’s relationship to the account owner and their specific characteristics, such as being a spouse, minor child, disabled or chronically ill individual, entity other than an individual.
• Whether the original account owner passed away before or after the date required to begin taking RMDs.