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What You Need To Know About RMDs In 2024
NewsThe 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A Required Minimum Distribution (RMD) represents the mandatory amount that must be withdrawn from various retirement accounts, including employer-sponsored retirement plans, traditional IRAs, SEPs, or SIMPLE IRAs, by their owners and qualified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.
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.
Final Thoughts
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.
Disclaimer: This content is for educational purposes only and should not be considered financial or investment advice. Please consult with the fiduciary advisors at Agemy Financial Strategies before making any investment decisions.
New Changes to Retirement Accounts in 2025: What You Need to Know
News, Retirement Income Planning, Retirement PlanningSignificant changes to IRAs and 401(k)s in 2025 bring new opportunities to save for retirement, but staying informed is essential to making the most of them.
These updates, driven by the SECURE 2.0 Act and other recent legislative measures, are designed to boost savings potential and streamline retirement planning for millions of Americans. Here’s an in-depth look at the major changes to retirement accounts in 2025, how they may affect your financial strategy, and what steps you can take to help optimize your retirement plan.
1. Increased Catch-Up Contribution Limits
If you’re 50 or older, you’re likely familiar with catch-up contributions—additional amounts you can contribute to your retirement accounts to accelerate your savings. For 2025, these limits will increase significantly for eligible savers:
401(k) Plans:
IRAs:
The increased contribution limits for 401(k)s and IRAs allow individuals to save more money for retirement. This is especially beneficial for those nearing retirement age who may have a shorter timeline to accumulate wealth.
For 2025, the base contribution limit increases slightly to $16,500, while the catch-up limit for those aged 50 and older remains unchanged at $3,500. However, a significant enhancement is coming for participants aged 60 to 63. This group’s catch-up contribution limit will increase to $5,000 or 150% of the standard age 50 catch-up contribution limit, adjusted for inflation.
In 2025, Individuals in this age range can contribute $5,250 more to their SIMPLE IRAs, providing a valuable opportunity to accelerate their retirement savings. For 2026, these limits will be adjusted annually for inflation, helping ensure contributions keep pace with rising costs.
These changes make SIMPLE IRAs a more powerful tool for retirement planning, particularly for those nearing retirement. Working alongside a trusted fiduciary advisor can help you navigate the complexities of Roth catch-up contributions and conversions.
3. Automatic Enrollment & Escalation in Employer Plans
To encourage more Americans to participate in workplace retirement plans, automatic enrollment and escalation features will become mandatory for most new 401(k) and 403(b) plans. Here’s how it works:
These features aim to help make retirement saving easier and more consistent, particularly for younger employees who may otherwise delay starting their retirement journey.
4. New 10-Year Rule For Inherited IRAs
If you inherited an IRA from someone who passed away on or after January 1, 2020, the IRS now requires you to withdraw all funds from the account by December 31st of the tenth full calendar year after the original account holder’s death. This rule replaces the traditional “stretch IRA” strategy, which previously allowed beneficiaries to extend withdrawals—and tax-deferred growth—over their lifetimes.
While the 10-year withdrawal rule applies to most beneficiaries, certain individuals can still utilize the stretch IRA provisions. These include:
For these exceptions, beneficiaries may withdraw funds over their lifetimes, starting the year after the decedent’s death. Surviving spouses also have the option to roll the inherited IRA into their own IRA, deferring required withdrawals until they reach their own “required beginning date” (RBD).
5. Inherited IRA RMD Penalties
The IRS has delayed implementing the final rules for required minimum distributions (RMDs) from inherited IRAs until 2025. During this transitional period, beneficiaries who did not take RMDs from their inherited IRAs between 2021 and 2024 have been granted relief from penalties.
However, starting in 2025, a 25% penalty will apply to those who fail to take their required RMD. Staying informed and proactive is essential to avoid penalties and help ensure compliance with the updated rules. Working with a fiduciary can help you navigate new RMD laws and help ensure you’re on the right track to avoid penalties.
With Americans holding many jobs over their lifetime, it’s not uncommon to lose track of retirement accounts from former employers. Currently, 29.2 million forgotten 401(k) accounts hold an estimated $1.65 trillion in assets.
To address this, the SECURE 2.0 Act established the Retirement Savings Lost and Found database, managed by the Department of Labor. This tool helps individuals locate lost retirement accounts using data submitted by plan administrators and uploaded by the Employee Benefits Security Administration (EBSA). To use the database, you’ll need a Login.gov account. Setup requires:
How an Advisor Can Help Optimize Your Retirement Plan
At Agemy Financial Strategies, our fiduciary advisors are dedicated to providing guidance that aligns with your best interests. Taking a holistic approach, we carefully analyze every aspect of your financial situation to help you achieve your envisioned retirement. Here’s how we can support you:
Final Thoughts
Understanding the changes to retirement accounts in 2025 is critical for making informed decisions about your financial future. These updates present new opportunities to save, invest, and grow your wealth but also require thoughtful planning. At Agemy Financial Strategies, we’re here to help you confidently navigate these changes and create a strategy tailored to your unique financial goals.
Contact us today to learn how we can help you secure a prosperous retirement.
Frequently Asked Questions (FAQs)
1. How do I know if I’m eligible for increased catch-up contributions?
To qualify for the higher catch-up contributions, participants must meet specific criteria: they must be aged 60 to 63 in December of that calendar year. These Individuals can utilize the enhanced catch-up contribution limits. Verifying your eligibility with your retirement plan provider is important, as different providers may have different rules.
2. What happens if I don’t want to participate in automatic enrollment?
Employees can opt out of automatic enrollment or adjust their contribution rate anytime.
3. Are Roth contributions better than traditional pre-tax contributions?
This depends on your current income, tax bracket, and retirement goals. Roth contributions can be advantageous if you anticipate being in a higher tax bracket in retirement.
4. How does inflation affect IRA contribution limits?
For 2025, IRA catch-up contributions will be indexed to inflation, helping savers to contribute more as the cost of living rises.
5. Can part-time workers participate in any retirement plan?
Eligibility varies by employer. However, the SECURE 2.0 Act helps ensure that part-time employees who work at least 500 hours per year for two consecutive years participate in their company’s 401(k) plan. This expands access to retirement savings for long-term part-time workers, even if eligibility may differ based on individual company policies.
Disclaimer: This blog is for informational purposes only and should not be considered financial, legal, or tax advice. Always consult the qualified fiduciary advisors at Agemy Financial Strategies to help determine how these changes apply to your circumstances.
ChatGPT vs. Financial Advisors
News, Retirement Income Planning, Retirement PlanningIn a world where technology is rapidly advancing, many are turning to AI for questions ranging from health concerns to intricate coding. But is this a sustainable long-term solution when planning for retirement? Let’s find out!
There’s no doubt that technology has become an integral part of our lives, including how we manage our money. With AI-powered chatbots like ChatGPT and Google Bard now available, people can easily find answers to their pressing questions. But is it advice we can trust when it comes to our financial future?
To help decide, we will explore the advantages and disadvantages of ChatGPT compared to a human financial advisor. Here’s what you need to know.
What Is ChatGPT?
ChatGPT is a part of the new generation of AI language models created by OpenAI. It harnesses the power of machine learning to comprehend and generate text that closely resembles human language. The more intricate the questions, the more detailed the response.
AI language models like ChatGPT have made significant contributions to various industries. For instance, businesses in customer service utilize ChatGPT to automate responses to common questions. It has also been instrumental in the education sector, assisting educators in creating intelligent tutoring systems that offer personalized support to help students.
Yet, as we embrace the many benefits of AI, it’s equally important to acknowledge its potential downsides, especially when it comes to sensitive monetary issues like investing.
Let’s take a look at how ChatGPT can help in the retirement planning process.
Advantages of Using ChatGPT
In retirement planning, making informed decisions is crucial to secure a financially stable future. Impressive data analysis capabilities, efficiency, accessibility, and affordability have positioned AI tools as an attractive alternative to financial advisors for retirement planning advice. Here are some of the advantages of using ChatGPT for retirement planning:
Limitations of ChatGPT
While ChatGPT undoubtedly offers numerous advantages in retirement planning, it’s equally important to recognize and understand its limitations. Let’s delve into some of these major constraints:
The Human Touch
While the capabilities of modern AI technology are impressive, it is important to recognize that AI systems would have to overcome significant trust hurdles before they would be in any position to replace human advisors.
In reality, human advisors possess the capacity to have significant conversations, attend to personal circumstances, respond to inquiries, and provide reassurance in a manner that artificial intelligence cannot imitate. This personalized approach and their ability to adjust guidance to match changing life circumstances render human financial advisors indispensable when delivering genuinely thorough financial advice to their clients.
Working With a Real Financial Advisor
Both ChatGPT and human financial advisors have their strengths regarding retirement planning advice. ChatGPT is great at math and can help with number-related tasks (though it’s a good idea to double-check its calculations), but when creating a customized financial plan to help you reach your long-term goals, a real financial advisor is the clear winner.
Financial advisors, particularly Fiduciary advisors, offer a personalized approach to retirement planning. A Fiduciary is an advisor who is legally and ethically bound to act in the interests of their clients. To recap, here’s why you should opt for a real financial professional regarding your retirement planning:
Human Guidance:
Real-life Fiduciary advisors offer personalized financial advice tailored to your specific goals, risk tolerance, and financial situation. They can understand your unique circumstances and provide human empathy and understanding in complex financial decisions.
Human Support:
Fiduciary advisors can provide emotional support during market volatility or life events, helping you stay committed to your long-term financial plan. They can offer reassurance and guidance when emotions might lead to impulsive decisions.
Multifaceted Financial Resolutions:
Human advisors excel in handling intricate financial scenarios, such as estate planning, tax optimization, and retirement income strategies. They can adapt strategies to changing regulations and market conditions, helping to ensure your financial plan remains relevant.
Fiduciary Duty:
Fiduciary advisors are legally obligated to act in your best interests, minimizing conflicts of interest. They offer transparency and accountability in their actions, helping you trust the advice you receive.
While AI can provide valuable financial insights and automate certain tasks, real-life fiduciary advisors offer a holistic and personalized approach to financial planning and support.
Final Thoughts
Planning for retirement is a significant financial milestone, and making informed decisions for a secure financial future is essential. As observed, ChatGPT provides universal information and insights for retirement planning based on the given parameters: It may help generate retirement savings goals and generic investment options; however, it cannot account for personal circumstances, goals, risk tolerance, and specific family dynamics as a human advisor can.
It’s always important to regularly meet with your financial advisor to get the facts from the source. Be sure to update them on your financial situation, including your expected retirement date, income needs, and any other family situations that may affect your financial plan.
Are you looking for the human touch in your retirement income plan? At Agemy Financial Strategies, our team of Fiduciary advisors is well-versed in comprehensive retirement planning services to help you reap a steady income stream throughout your golden years. We are dedicated to helping clients navigate the intricacies of planning for retirement to help ensure you never outlive your savings.
If you’re ready to begin your retirement planning journey, contact us today to set up your complimentary consultation.
Disclaimer: This content is for educational purposes only and should not be considered financial or investment advice. Please consult with the fiduciary advisors at Agemy Financial Strategies before making any investment decisions.
Is a Self-Directed IRA Right For You?
NewsIRAs are a great way to invest for your retirement years. But if you want to invest in assets like precious metals, real estate and crypto, certain assets are off-limits. That’s where opening a self-directed IRA comes into play.
If you’re approaching retirement, you’re likely exploring avenues to fine-tune your financial strategy. One option worth considering is the Self-Directed Individual Retirement Account (SDIRA). While traditional IRAs and 401(k)s certainly have their benefits, SDIRAs present distinct advantages for retirees with substantial wealth.
In this blog post, we will delve into the world of SDIRAs, examining their benefits, potential drawbacks, and whether they align with your needs in retirement. Here’s what you need to know.
What is a Self-Directed IRA?
A Self-Directed Individual Retirement Account (SDIRA) is a retirement savings account that gives you greater control over your investments than traditional IRAs. The main difference between an SDIRA and other IRAs is the types of investments allowed. Regular IRAs limit you to common investments like stocks, bonds, CDs, and mutual funds.
As of 2023, there has been an 11.1% uptick in the number of Americans choosing to open IRA accounts. This surge is reflected in the table below, which shows a total of 13.1 million IRA accounts currently active.
However, SDIRAs open the door to a wider range of assets. With an SDIRA, you can invest in precious metals, commodities, private placements, real estate, and other unique options. This means that managing an SDIRA requires more effort and careful research from the account owner.
Understanding Taxes, Withdrawals and Contributions
Contributions to a self-directed IRA are limited to yearly amounts. In 2023, this amount is $6,500 for individuals under 50, and if you’re over 50, you can add an extra $1,000 as a catch-up contribution.
When you decide to start taking money out, you’ll have to pay regular income taxes unless you’re 59½ or older. If you withdraw any funds before hitting this age, there’s a 10% penalty, and you’ll still owe income tax on what you take out.
Once you reach 73, the IRS says you must begin withdrawing money. The amount you need to withdraw depends on your account balance and life expectancy, following their minimum requirements.
Benefits of Self-Directed IRAs for High Net Worth Retirees
It is common for most high-net-worth retirees to invest a notable portion of their wealth in traditional avenues. Self-Directed IRAs (SDIRAs) present a valuable opportunity to grow your investment portfolio. Here’s a look at some of the benefits SDIRAs can offer:
Now that we know about the benefits let’s look at some drawbacks.
Potential Drawbacks of Self-Directed IRAs
Managing SDIRAs can be more intricate than traditional retirement accounts, requiring a deeper understanding of investment options and compliance with IRS regulations. While SDIRAs offer many advantages, it’s important to be aware of their potential drawbacks:
Working with a financial advisor can help you understand the advantages and drawbacks of SDIRAs. They can assist you in making informed decisions about your retirement savings strategy.
Is a Self-Directed IRA Right for You?
Determining whether a Self-Directed Individual Retirement Account (SDIRA) is the right choice for you involves considering various crucial factors. Firstly, your level of investment experience plays a pivotal role; if you possess knowledge in alternative investments like real estate or private equity, an SDIRA may align well with your expertise and interests.
Secondly, assessing your risk tolerance is vital, as self-directed investments carry potential risks that require careful management and due diligence. Lastly, consulting with a financial advisor to understand the tax implications of incorporating an SDIRA into your financial strategy is essential. They can help you learn about the potential tax benefits and associated consequences.
Working With a Financial Advisor
Navigating the complexities of retirement planning, especially with Self-Directed IRAs, can be challenging. Working with an experienced financial advisor becomes crucial to help you navigate this financial realm.
A financial advisor can help you review your investments while accounting for risk management tactics to help ensure they remain in sync with your financial situation. At Agemy Financial Strategies, our team of financial advisors is here to walk you through the process of achieving renewable wealth so that your money can work hard for you and you can reap the benefits of a comfortable retirement. Here are just some of the many ways we can help our clients:
By regularly reviewing and adjusting your plan, you can make informed decisions to help maximize your retirement savings and help ensure financial security for you and your loved ones.
Last Thoughts
Self-Directed IRAs offer a unique way to plan for retirement, especially for those nearing retirement. However, they require careful thought and more active management of your investments.
To see if an SDIRA fits your retirement goals and financial situation, it’s crucial to talk to a financial advisor. Making the right choice can set you up for a successful retirement that helps your finances for years to come.
Start your journey to financial success by scheduling your complimentary strategy session today.
Investing in Real Estate During Retirement
News, Real EstateDo you REALLY need Real Estate in your investment portfolio? If you do, what percentage of your portfolio should it cover? Let’s find out.
Navigating investments at any stage in life can be complex, but the stakes become even higher as retirement approaches. During retirement, the main goal is to minimize risk, generate income, and protect your assets from inflation. So, is real estate a good option for retirement?
The answer is not a one-size-fits-all solution. It depends on various factors unique to your situation. In this blog, we will explore real estate investments for retirees and how you can make informed decisions that align with your goals and needs. Here’s what you should know.
What are Real Estate Investments?
While many people own the home they live in, generally, that’s not considered a real estate investment. Adding real estate to your portfolio can add diversity and growth to your portfolio without adding significant risk (though, like with all investments, risk is always a factor to consider).
Real estate investments are either active or passive. Active ones, like house flipping or managing rentals, demand your time, effort, and often more money. They can earn more but come with higher risks. Passive ones, like investing in REITs or real estate funds, don’t need you to manage properties and are less hands-on with a smaller initial investment.
The Benefits of Real Estate Investments
Real estate has been a popular form of investment for decades. Whether buying, owning, or managing real estate properties, you can generate income, capital appreciation, or both. Unlike other investment options, real estate often provides a steady and predictable cash flow, making it an attractive choice for individuals searching for a stable income stream.
Even though mortgage rates nationwide have recently become more affordable, as of January 2023, home prices in the United States dropped for the seventh consecutive month. As a result, sellers are finding themselves in a situation where they are more willing to accommodate their buyers’ requests, which can lead to some excellent deals for buyers.
Looking back at historical trends, real estate has consistently demonstrated an inclination to increase in value over time. Although short-term fluctuations may occur, well-located properties tend to see their worth rise over the years, giving investors the opportunity for significant capital gains when they eventually decide to sell.
In addition to these benefits, real estate investments offer valuable tax advantages. These tax benefits can substantially reduce your overall tax liability, further enhancing the financial attractiveness of real estate investments. Now that we have explored the benefits of direct real estate investments, let’s dive into Real Estate Investment Trusts (REITs).
To sum up, the reasons why so many investors choose Real Estate in their portfolio include:
Consider Real Estate Investment Trusts (REITs) for Your Portfolio
Real estate investment trusts (REITs) offer a unique way for investors to join forces and invest in properties collectively. Think of it as a mutual fund, but it focuses on real estate instead of stocks.
For seasoned investors, REITs can be a valuable addition to their portfolio. However, if you’re starting your investment journey, it’s prudent to concentrate on wealth accumulation before diving into REITs. While dependable REITs are in the market, others rely heavily on debt to acquire properties, elevating the investment risk.
Before venturing into REITs, it’s essential to consult with an investment professional, like a Fiduciary Advisor. They can help you evaluate potential risks and ascertain whether REITs align with your financial objectives and overall investment strategy.
Understanding Risks in Real Estate
While real estate investments offer numerous advantages, they have their fair share of risks and challenges. Here are some key considerations:
By understanding these potential risks and preparing accordingly, investors can make more informed decisions and develop strategies to mitigate these challenges, ultimately optimizing the benefits of their real estate investments.
Real Estate in Connecticut
Connecticut boasts a unique blend of natural beauty, a rich history, and a proximity to major cities like New York City and Boston. These factors contribute to a real estate market that has proven to be a stable and potentially lucrative investment opportunity.
Here are some reasons why investing in Connecticut real estate during retirement makes sense:
Real Estate in Colorado
With our sister office located in Denver, Colorado, we have the inside knowledge and advice if you are considering adding Colorado Real Estate into your portfolio.
The Role of a Fiduciary Advisor
Investing in real estate during retirement can pose complexities, especially for those managing significant portfolios. If you’re seeking a Connecticut-based or Colorado-based Fiduciary Advisor with extensive experience in real estate investments, Agemy Financial Strategies is here to help.
Fiduciary Advisors are legally obligated to prioritize your best interests, delivering impartial advice and recommendations aligned with your financial goals. Our seasoned professionals can help you identify opportunities and make well-informed decisions tailored to your unique needs and objectives.
Our advisors are adept at seamlessly integrating your real estate investments into your comprehensive retirement portfolio, helping to ensure it remains balanced and diversified. To explore our full service offerings, see here.
Final Thoughts
Investors should stay informed about changes in the real estate market and be prepared to adjust their investment strategy accordingly. Partnering with a Fiduciary advisor can help you mitigate risks and take advantage of upcoming opportunities. At Agemy Financial Strategies, you can rest assured knowing you are working with professionals who have your best interests at heart. Our Fiduciaries are here to help you make informed decisions and enjoy a financially secure retirement.
Ready to see if real estate investments are right for you? If you’re ready to start the conversation, contact us today to schedule your complimentary consultation.
Disclaimer: This content is for educational purposes only and should not be considered financial or investment advice. Please consult with the fiduciary advisors at Agemy Financial Strategies before making any investment decisions.
RMDs: The 3-Year Statute of Limitations
News, Retirement PlanningIf you’re approaching retirement, you might be familiar with Required Minimum Distributions (RMDs). However, the rules surrounding RMDs are changing, and without proper planning, you could risk IRS-enforced collections. Here’s what you need to know.
The SECURE 2.0 Act of 2022, enacted Dec. 29, includes almost 100 new retirement plan provisions, many of which aren’t effective yet. But some big changes involving required minimum distributions and related penalty relief are already in effect
Before we delve into the 3-year statute of limitations, let’s briefly recap what RMDs are and why they matter.
What are RMDs?
A required minimum distribution (RMD) is the amount of money that must be withdrawn from employer-sponsored retirement plans by owners and qualified retirement plan participants of retirement age.
In 2023, the age at which you must begin taking RMDs changed to 73 years. Account holders must, therefore, start withdrawing from a retirement account by April 1, following the year they reach age 73. The exact age may vary depending on your retirement plan and when you were born.
The IRS uses a specific formula to calculate your RMD, considering your account balance and factors related to life expectancy. In 2023, the RMD table is based on the IRS’s widely-used Uniform Lifetime Table. It’s worth noting that the IRS has additional tables for account holders and beneficiaries whose spouses are considerably younger.
SECURE 2.0 Shakes Things Up for RMDs
The Securing a Strong Retirement Act of 2022, known as SECURE 2.0 Act, made some changes to the rules about when and how people need to take out money from their retirement plans to avoid being hit with extra taxes.
These changes were designed to make things easier for retirees by giving them more time to file, removing certain requirements, and lowering penalties if they make a mistake. Some of these updates are already in place, and others will start in the coming years, with the last ones kicking in by 2033. The main changes to RMDs include:
1. Changes to the Participant’s RMD Age (Effective in 2023)
Under the SECURE Act of 2019, the RMD age for a terminated participant increased from 70½ to 72 effective in 2020. SECURE 2.0 again changes the RMD age to 73 in 2023, and ultimately to age 75. The chart below highlights the changes to the RMD age at relevant points in time.
2. No RMDs Required from Roth Accounts (Effective in 2024)
For 2024 and later years, RMDs are no longer required from designated Roth accounts. You must still take RMDs from designated Roth accounts for 2023, including those with a required beginning date of April 1, 2024. You can withdraw more than the minimum required amount.
3. Removing RMD Barriers to Life Annuities
The rules for Required Minimum Distributions are designed to prevent individuals from deferring taxes for too long, and one way they achieve this is by limiting annuity contracts from providing small initial payments that grow excessively over time. However, in practice, these rules can sometimes restrict even minor increases in benefits. But now, Congress is working to make annuity contracts in defined contribution plans more appealing.
Section 201 of the Act allows commercial annuities purchased under 401(k) and other defined contribution plans, as well as IRAs, to offer the following:
4. Reduction in Excise Tax for RMD Errors
Despite regularly appearing on the list of priorities for tax-exempt and government entities’ compliance, it’s not unusual for people to make mistakes when it comes to Required Minimum Distributions (RMDs).
Up to now, one of the largest penalties in the Tax Code was the 50% penalty for not taking an RMD. It was based on the RMD amount that should have been taken but wasn’t.
SECURE 2.0 lowers this penalty to 25%, and then to 10% if the missed RMD is timely made up.
What is the Statue of Limitations?
The statute of limitations is the time limit for the IRS to file charges or collect back taxes. In general, a statute of limitations is a law (statute) that limits how far back you can go when assessing a penalty, charging someone with a crime, or taking other actions. There are different statutes of limitations for different types of tax issues.
RMDs and the 3-Year Statute of Limitations
There is now a three-year statute of limitations associated with the failure to take a required minimum distribution (RMD) from a retirement account. Overlooked when the SECURE Act 2.0 was enacted was Section 313 of the Act, which added a 3-year statute of limitation for the failure to take an RMD. If an RMD is missed, the 25% penalty is only applicable for the next three years. So what happens after those three years have passed?
The statutes of limitations not only limits the IRS in assessing additional tax on returns filed, but it also limits the amount of time you have to claim a refund or credit due. If the three-year deadline for filing has passed, the IRS, by law, cannot issue your refund.
IRS Form 5329 is a tax form used for reporting retirement plan penalties and requesting a waiver of the RMD penalty. As mentioned above, in the past, not filling out this form for penalty relief meant that the three-year statute of limitations wouldn’t start, resulting in a hefty 50% excise tax. However, thanks to the SECURE 2.0 Act, this tax has been reduced to 25%, and it could drop to 10% if you take action to withdraw the missed RMD within two years.
To solve this problem, the SECURE 2.0 Act introduced a statute of limitations tied to when individual files their federal income tax return, Form 1040. If no federal income tax return is required, the statute period begins on what would have been the tax filing deadline. This new statute of limitations covers missed RMDs for three years and excess IRA contributions for six years but doesn’t apply to early distributions.
Form 5329 left the statute of limitations open indefinitely, allowing penalties and interest to accumulate unnoticed. A positive outcome happened once Congress addressed the issue. However, even with these changes, there are still exceptions retirees should make note of.
Exceptions to the Rule
While the 3-year statute of limitations relieves many retirees, it’s essential to be aware of exceptions. Not all missed RMDs qualify for this extended correction period. Here are some important exceptions:
Working With a Fiduciary Advisor
It’s important to understand how the recent law changes affect your IRA. One of the more relevant topics IRA owners should be aware of is a Required Minimum Distribution (RMD). Partnering with a trusted Fiduciary Advisor can play a crucial role in helping you manage your RMDs effectively so you meet your legal obligations while optimizing your financial situation. They can also offer tailored guidance to help maximize your retirement savings while following IRS rules.
You don’t have to battle the confusing regulations for certain required minimum distributions alone. From advice on understanding your specific RMD obligations, to helping you explore tax-efficient ways to manage your RMDs, Agemy Financial Strategies works alongside you to assess your retirement income needs and create a plan for your unique needs and goals.
Final Thoughts
This 3-year statute of limitations provision is yet one more reason why we anxiously await proposed Regulations from the IRS with respect to how the SECURE Act 2.0 will be interpreted. There are several other provisions in the Act that need a lot of clarification. A solid understanding of Required Minimum Distributions is essential for anyone with tax-advantaged retirement accounts. Failing to comply with RMD rules can result in costly penalties, potentially derailing your retirement plans.
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. 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.
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Disclaimer: This content is for educational purposes only and should not be considered financial or investment advice. Please consult with the fiduciary advisors at Agemy Financial Strategies before making any investment decisions.