SECURE 2.0: Changes to required minimum distribution rules
Authored by Christine Faris, Devin Tenney and Matt Marcellino
Congress enacted the retirement plan legislation SECURE 2.0 in December 2022 as part of the Consolidated Appropriations Act, 2023 (the Act). It includes over 90 provisions, many of which affect employer-sponsored retirement plans and IRAs. This Alert focuses on the changes to requirement minimum distributions.
Background
Required minimum distributions (RMDs) were first introduced in 1986 and require that an individual take a distribution from the individual’s tax-deferred retirement accounts once the individual attained the age of 70 ½. The individual has until April 1 of the year following the year in which the individual reached 70 ½ to take the first RMD. Subsequent RMDs must be taken annually. If an RMD is not taken, a penalty is applied.
However, if the individual is still employed and does not own more than 5% of the company, the individual may delay taking the RMD until actual retirement. This exception applies only to employer-sponsored retirement plans and not to IRAs.
In 2019, the SECURE Act of 2019 increased the age for RMDs to age 72 from 70 ½.
SECURE 2.0
SECURE 2.0 increases the RMD age two more times. The first increase is to age 73 for individuals who reach age 72 in 2023 or later. For example, an individual who attains age 72 in 2023 does not have an RMD requirement until the individual turns age 73 in 2024. In addition, the individual has until April 1, 2025, to take the first RMD. The second increase is to age 75 for individuals and applies to individuals who attain age 74 on or after Jan. 1, 2033. In this case, an individual who is 74 years old in 2033 has until April 1, 2035, to take the first RMD. The “still working” exception described above continues to apply.
The RMD requirement applies to employer-sponsored retirement plans and IRAs, including SEP IRAs and SIMPLE IRAs. It does not apply to Roth IRAs and, beginning in 2024, the RMD requirement will no longer apply to Roth 401(k) accounts. The RMD changes are mandatory and require amendments to retirement plans and IRAs.
By prolonging the RMD age, Congress’s objective is to provide individuals with more time to increase their retirement savings to use during their lifetime.
Excise tax
Sometimes mistakes happen and an individual forgets to take an RMD. Prior to SECURE 2.0 being enacted, the individual had to pay an excise tax equal to 50% of the missed RMD. With SECURE 2.0, the excise tax is reduced from 50% to 25%. The excise tax is further reduced to 10% if the missed RMD is taken within two years.
Early withdrawals
A distribution from a retirement plan or an IRA before age 59 ½ is known as an early withdrawal and is subject to a 10% excise tax. Some early withdrawals from retirement plans can be rolled over to another retirement plan or IRA in which case the 10% excise tax does not apply to the distribution.
After age 59 ½, distributions from retirement plans and IRAs are not subject to the 10% excise tax.
Impact on Social Security
The retirement age to begin collecting maximum Social Security payments remains unchanged at age 70. Although the RMD age does not directly impact Social Security, individuals may want to discuss the timing and amount of distributions with their financial advisors as part of their retirement planning.
Learn more
To learn more about SECURE 2.0 and how these changes to required minimum distribution rules may affect you, please contact your Baker Tilly advisor.