Traditional IRAs and 401(k) plans let workers invest pre-tax dollars and deduct contributions from taxable income in the present. In exchange, they pay income tax on contributions (and any gains) in the future.
The tax bill cannot be delayed indefinitely. Tax-deferred retirement accounts are subject to required minimum distribution (RMDs), which means accountholders upon reaching a certain must make sufficient withdrawals to ensure the government can collect its tax revenue.
Importantly, the Secure Act of 2022 modified the age at which RMDs begin and the penalty for not taking RMDs in a timely fashion. While the legislation has been effective for several years, some accountholders may still be confused. Here are the important details.
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The Secure 2.0 Act increased the age at which RMDs begin
The age at which required minimum distributions begin depends on your birth year, but the age thresholds have gradually increased over time. The Secure Act of 2019 (Secure 1.0) raised the starting age from 70 1/2 to 72 for those born on or after July 1, 1949. And the Secure Act of 2022 (Secure 2.0) raised the starting age from 72 to 73 for those born on or after Jan. 1, 1951.
The following chart provides a consolidated view of when RMDs begin.
|
Accountholder's Birth Date |
Age When RMDs Begin |
|---|---|
|
Before July 1, 1949 |
70 1/2 |
|
July 1, 1949, to Dec. 31, 1950 |
72 |
|
January 1, 1951, to Dec. 31, 1959 |
73 |
|
After Dec. 31, 1959 |
75 |
Data source: Internal Revenue Service.
RMDs on traditional 401(k) plans and traditional IRAs (including SEP IRAs and SIMPLE IRAs) are mandatory once the accountholder reaches the age listed in the chart regardless of employment status. RMDs must generally be completed by Dec. 31, but the first RMD can be delayed until April 1 of the following year.
Consider this example: Kate turns 73 years old in 2026, meaning she is now required to take RMDs. Kate can delay her first mandatory distribution until April 1, 2027, but the second distribution must still be completed by Dec. 31, 2027. Also, every distribution thereafter must be completed by Dec. 31.
Importantly, the Secure 2.0 Act eliminated RMDs on Roth 401(k) plans. Before the legislation passed, there was a discrepancy in that Roth IRAs were not subject to RMDs, while Roth 401(k) plans were. However, that change applies only to the original accountholder. Roth accounts beneficiaries are still subject RMD rules.
The Secure 2.0 Act reduced the penalty when RMDs are not completed on time
RMD amounts are calculated by dividing the relevant account balance from Dec. 31 in the prior year by a life expectancy factor found in one of three tables published by the IRS. The circumstances that determine which table is correct are as follows:
- Table I (Single Life Expectancy): Beneficiaries use this table.
- Table II (Joint and Last Survivor Life Expectancy): Accountholders use this table if their spouse is the sole beneficiary and more than 10 years younger.
- Table III (Uniform Lifetime): Accountholders use this table if their spouse is the sole beneficiary but not more than 10 years younger, or else if they have multiple beneficiaries.
Before the Secure 2.0 Act became law, the IRS could charge an excise tax penalty of 50% when RMDs were not taken on time. That means the accountholder could have owed as much as 50% of the amount not withdrawn by the deadline. However, the Secure 2.0 Act reduced the penalty to 25%.
Importantly, the excise tax can be further reduced to 10% if the error is corrected within two years. The penalty can also be waived entirely if the accountholder can demonstrate the shortfall was due to a reasonable error and the problem is fixed immediately. In either scenario, accountholders must submit a Form 5329 along with their tax return. Those who want the penalty waived entirely must also include a letter of explanation.
