The $1.7 trillion spending bill approved by Congress last week includes key provisions for retirement savers. The retirement-related laws are collectively dubbed the Secure 2.0 Act. Many of the changes -- like mandatory automatic enrollment in new 401(k) plans and expanded catch-up contributions for people ages 60 to 63 -- are meant to help workers build their nest eggs.
But the bill also includes two important changes to required minimum distributions (RMDs) for retirement-age individuals that will take effect in 2023. Here are the two big changes seniors need to know about.
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RMD age will increase to 73
Required minimum distributions (RMDs) are withdrawals that the IRS requires seniors to take from most types of retirement accounts. Beginning Jan. 1, 2023, the starting age will rise from 72 to 73. The Secure 2.0 Act will eventually increase RMD age to 75 in 2033. The original SECURE Act, which was signed into law in late 2019, increased the age for RMDs from 70 1/2 to 72.
Pushing back the age for RMDs is unlikely to impact the average senior because many people will need to withdraw money from retirement accounts for living expenses before they're in their 70s. But for those who can afford to hold off on taking distributions, the change is a win because their money gets more time to grow.
If you turned 72 in 2022 or earlier, you'll need to continue taking your RMDs, as usual. But if you're turning 72 in 2023, you can choose to wait an extra year.
Those celebrating their 72nd birthday in 2023 will need to take their first RMD by Dec. 31, 2024 or delay the initial RMD until April 1, 2025. But if you choose to delay until April 2025, you'll need to take a second RMD for the same year by Dec. 31, 2025.
Reduced penalties for not taking RMDs
The penalties for not taking RMDs are harsh, but the Secure 2.0 Act gives a break to those who fail to take RMDs. Beginning in 2023, the penalty will drop from the current 50% of the amount not taken to 25%. The fine drops to 10% for individual retirement account (IRA) owners who don't take an RMD but correct their mistake in a "timely manner."
A big change coming in 2024
Under current law, RMDs are mandatory during the account-owner's lifetime for all retirement accounts other than a Roth IRA. But starting in 2024, 401(k)s and other workplace plans with a Roth designation -- meaning the account is funded with post-tax dollars and gets tax-free treatment in retirement -- will no longer come with RMDs while the owner is still living. As with Roth IRAs, the owner will be able to avoid distributions and leave the entire account to their beneficiaries.
Again, this won't impact the average person who needs to withdraw from their accounts for retirement expenses. But for affluent taxpayers who can afford to leave that money to their beneficiaries, the new law will make Roth-designated accounts an even more appealing vehicle for building wealth.
