Tax Tip Tuesday: SECURE 2.0 and Your RMD

Tax Tip Tuesday

Right before the Christmas break, legislators voted on SECURE Act 2.0 which is now law. This omnibus bill contained lots of provisions, but the big news is the key changes SECURE 2.0 has on your Required Minimum Distribution (RMD) from your retirement accounts.

RMDs force (hence the word “required”) people to pull money from their retirement accounts after a certain age.  This is because the government is aiming to raise income tax revenue and prevent savers from using their accounts as tax shelters. 

If you are in or near retirement, here are three key take-aways that you need to know.

  1. The age at which owners of retirement accounts must start taking RMDs will increase to 73, starting January 1, 2023. In 2022, the age to begin taking RMDs was 72.  Now individuals will have an additional year to delay taking a mandatory withdrawal of deferred savings from their retirement accounts.

However, for those individuals who turn 73 this year, the first distribution must be taken no later than April 1, 2024. If you delay taking the RMD until then, you will need to take 2 distributions in 2024; the one that was for 2023 and then the one for 2024.

Two important things to consider:

  1. If you turned 72 in 2022 or earlier, you need to continue taking RMDs as scheduled.
  2. If you’re turning 72 in 2023 and have already scheduled your withdrawal, you may want to consider updating your withdrawal plan if it makes financial sense for you to postpone the distribution for another year.

For those who may be 10 years out from retirement, be aware that SECURE 2.0 pushes the age to 75 in 2033 for mandatory RMDs.

  1. The penalty for failing to take the required minimum distribution decreases in 2023 to 25% of the RMD amount not taken.  (Previously, it was a whopping 50% penalty.) If the taxpayer corrects their mistake, the penalty will be further reduced to 10% if it is demonstrated that the shortfall was due to a reasonable error and that reasonable steps are being taken to remedy it.  This includes the owner withdrawing the RMD amount previously not taken AND submitting a tax return in a timely manner.
  1. The elimination of required minimum distributions for investors in employer retirement plans, such as 401(K), begins in 2024.  This change aligns Roth 401(k) with Roth IRAs, which don’t require distributions during one’s lifetime.

That discrepancy was a key reason why Roth 401(k) owners like to roll money out of their workplace retirement plan to a Roth IRA — thereby avoiding RMDs and allowing retirement funds to continue growing tax-free.

Here’s a few other interesting tidbits regarding retirement and savings.  Read through them in the event one or more of these scenarios apply to you:

  • 529 plan beneficiaries with unused funds post-college should not distribute the funds since they can fund a future Roth IRA transfer starting in tax year 2024 (if they meet the holding period requirements).
  • Taxpayers who took retirement distributions during 2021 and 2022 and lived in a qualified disaster area may be able to claim special tax treatment for those distributions.
  • Taxpayers with domestic employees have the option of a SEP retirement plan for those employees starting in tax year 2023.
  • Clients who took a prior qualified birth and adoption distribution can repay it before January 1, 2026. Take note of the refund statute of limitations end date for the tax year in question.
  • There are new or enhanced 10% penalty exceptions for taxpayers with terminal illnesses and victims of domestic violence starting in 2023.

SECURE 2.0 has its pros and cons.  To better understand how the provisions can benefit you from a tax perspective, contact us at 301-714-2071 or visit www.SaundersTax.com.  We have been helping our clients enjoy a Less Taxing Life and More Prosperous Solutions since 1984. And we can help you, too!

Comments

Richard Lee Kissel obituary 1944~2023

Mr. Kissel retired from US Department of Commerce, National Institutes of Science & Technology (NIST) after 31 years of service with the Federal Government.

Mabel V Mooney obituary 1926~2023

Mabel was a homemaker throughout her life. In her free time she enjoyed bowling (in younger years), watching game shows, and playing cards.