The SECURE Act 2.0, enacted in late 2022, changed over 90 rules about IRAs and other qualified retirement plans, including RMDs. Here's what you need to know about upcoming changes in 2024.
A Required Minimum Distribution (RMD) represents the mandatory amount that must be withdrawn from various retirement accounts, including employer-sponsored retirement plans, traditional IRAs, SEPs, or SIMPLE IRAs, by their owners and qualified retirement plan participants once they reach retirement age.
Each account has its RMD calculation, and the distribution must be taken from the respective account unless specific exceptions apply. There's still time to take your RMD from your retirement accounts (excluding Roth IRAs) before the year's end—but time is of the essence. Here's what you need to know for 2024.
Understanding SECURE Act 2.0 Changes
The SECURE 2.0 Act, officially named the Securing a Strong Retirement Act of 2022, ushered in a wave of modifications to the regulations governing when and how individuals must withdraw funds from their retirement accounts to avoid incurring additional taxes and penalties. These alterations were crafted to simplify the retirement landscape for individuals by extending deadlines, eliminating certain requirements, and reducing penalties for errors.
Some of these changes have already taken effect, while others are slated to roll out in the coming years, with the final adjustments set to be fully implemented by 2033. The primary modifications to the Required Minimum Distributions (RMDs) encompass adjustments to the RMD age, exemption of RMDs for Roth accounts, the removal of RMD obstacles for life annuities, and a reduction in excise tax penalties for RMD errors, along with the introduction of a 3-year statute of limitations. Let's delve into these details and understand what they mean for 2024.
When Do I Need to Take My RMD?
RMDs are mandatory withdrawals from certain tax-advantaged retirement accounts. The first time you take an RMD, you’ll have until April 1 of the year following the year you turn 72 (or age 73 if you turn 72 in 2023 or later) to do so. The IRS sets this age threshold to confirm that retirees begin drawing down their retirement savings and paying taxes on the deferred income.
The deadline for taking your RMD each year is December 31st. Failing to withdraw the required amount by this date can result in steep penalties—a 25% excise tax on the amount you should have withdrawn. If the RMD is missed, you must fill out IRS Form 5329. See Part IX of this form for the section regarding the additional tax on excess contributions.
Which Accounts Require Distributions?
RMDs are primarily associated with traditional Individual Retirement Accounts (IRAs) and employer-sponsored retirement plans such as 401(k)s and 403(b)s. Roth IRAs do not require RMDs during the account owner's lifetime; they are funded with after-tax dollars. However, beneficiaries of Roth IRAs may have RMD obligations.
You must calculate the RMD for each account separately if you own multiple traditional IRAs. However, you can aggregate the total RMD amount and withdraw it from one or more of your IRAs. This flexibility allows you to choose which account(s) to withdraw from as long as you satisfy the total RMD requirement.
You can use the IRS's Uniform Lifetime Table to determine the amount you need to withdraw. The RMD amount is calculated based on your account balance and life expectancy to deplete the account over your expected lifetime. If you haven't yet done so, estimate your personal RMD withdrawals with our free online RMD Calculator here.
What Is The 3-Year Statute Of Limitations?
A statute of limitations is a time frame within which the IRS can take legal action or collect unpaid taxes. It's a legal restriction that dictates how far back the IRS can reach when assessing penalties, pursuing criminal charges, or initiating other actions related to tax matters. Tax issues have different statutes of limitations, each with specific rules and considerations.
Previously, Form 5329 left the statute of limitations open-ended, allowing penalties and interest to accumulate without a defined limit. Fortunately, Congress addressed this issue, but it's important to note that there are still some exceptions that retirees should be aware of.
- Extended Statute for Excess IRA Contributions: The SECURE 2.0 Act extends the statute of limitations to 6 years for the 6% excess IRA contribution penalty. However, this relief is unavailable if an IRA has acquired property below its fair market value, and the statute of limitations remains indefinite if Form 5329 isn't filed.
- Expansion of IRS Self-Correction Program: SECURE 2.0 broadens the IRS self-correction program, known as the Employee Plans Compliance Resolution System (EPCRS), to include individual retirement account errors, including a waiver for failure to take RMDs. Note that self-correction for IRAs under EPCRS may be available for only a few years, as SECURE 2.0 grants the IRS that timeframe to guide this matter.
- Elimination of RMDs for Roth 401(k)s: SECURE 2.0 brings welcome relief by eliminating required minimum distributions (RMDs) for Roth 401(k)s and other employer Roth plans. While Roth IRAs were never subject to lifetime RMDs, Roth 401(k)s were. Starting in 2024, individuals will not need to roll over Roth 401(k) funds to a Roth IRA to avoid RMDs, as these funds will be exempt from RMDs.
Working With a Fiduciary Advisor
Understanding how recent changes impact your IRA is crucial in the ever-evolving landscape of retirement laws. Among the essential topics for IRA owners to grasp is the concept of RMDs. Working with a trusted fiduciary advisor can be a game-changer in effectively managing - and understanding - your RMDs. They can help you fulfill your legal obligations and provide personalized guidance to optimize your financial situation within the bounds of IRS regulations.
You don't have to tackle the complexities of required minimum distributions alone. At Agemy Financial Strategies, we are here to offer in-depth insights into your specific RMD responsibilities and explore tax-efficient strategies for RMD management. We work with you to assess your retirement income needs and craft a tailored plan aligned with your unique financial goals. Please refer to our service offerings page for a comprehensive list of our services.
By staying informed about when RMDs apply, how they’re calculated, and your options for managing them, you can confidently navigate this aspect of retirement planning with confidence. If you're ready to take the first step to achieving your retirement goals, our team is here to assist you. The better you comprehend your financial strategy, the more effectively you can manage your finances for generations to come!
Set up your complimentary retirement strategy session today. We look forward to helping you on your road to retirement and beyond.