There have been two age changes in the past three years related to those who are required to take … [+]
Age 72? Age 73?
Required minimum distributions from IRAs and other tax-deferred retirement accounts are mandated for people of a certain age. What age? Lawmakers keep moving the goal posts.
Two sets of laws come into play.
The law that went into effect at the end 0f 2022 is SECURE Act 2.0. The act was part of the 2023 Consolidated Appropriations Act.
SECURE Act 2.0 changed the mandated starting age for RMDs from 72 to 73.
Just a few years earlier, SECURE Act 1.0 (adopted in 2019) raised the mandated age from 70 1/2 to 72.
That’s two RMD age changes within three years, with more to come.
RMD Confusion
SECURE Act 2.0 caused confusion for individuals born in 1950. They turned 72 in 2022 and 73 in 2023. What rule applies to them?
The answer lies in the details of SECURE Act 2.0.
Quoting SECURE Act 2.0, the age 73 change applies to “an individual who attains age 72 after December 31, 2022.” Since those born in 1950 attained age 72 in 2022, Secure Act 2.0 does not apply to them. The law in effect before SECURE Act 2.0 applies to them: SECURE Act 1.0, with its age 72 mandate.
SECURE Act 2.0 picks up those born in 1951 and later. They start their RMDs at age 73 (until another change in the law comes into effect after 2032 to raise the age to 75).
I’d like to lay out those dates and RMDs in tables so that we can be on the same page to discuss “required beginning dates” later in this post.
The First, But Only the First, RMD
RBDs have to do with the very first RMD. Basically, the RBD offers the IRA owner a one-time-only option to consider when taking his first – and only his first — RMD.
Let’s go back to 2022.
As you can see in the table below, someone born in 1950 would be age 72 in 2022, which would make him subject to 2022 RMDs, again, under SECURE Act 1.0 rules.
Someone born in 1951 would be 71 in 2022 and not subject to RMDs in 2022.
Now, let’s go to 2023. The person born in 1951 would turn 72 in 2023, but he would not be subject to RMDs until 2024 — again, under SECURE Act 2.0 rules.
The person born in 1951 would be subject to RMDs in 2024 at age 73 under SECURE Act 2.0.
Now let’s turn to timing your first RMD.
April 1: Required Beginning Date
Your required beginning date sets up the timing of your first RMD.
The most recent IRS publication gives you the rule, but be forewarned: disregard the reference to age 72, as it applies to SECURE Act 1.0.
“[Y]ou must generally start receiving distributions from your IRA by April 1 of the year following the year in which you reach age 72,” quoting IRS Publication 590-B, the latest version of which was published in 2023 and used for preparing 2022 tax-year returns – before SECURE Act 2.0 took effect.
Under SECURE Act 2.0, the publication would read: “[Y]ou must generally start receiving distributions from your IRA by April 1 of the year following the year in which you reach age 73.”
Let’s go over another table for SECURE Act 2.0 for the individual born in 1951 who has an RMD for 2024. Option 2 shows the effect of the RBD.
Again, we’re talking about the individual born in 1951 who turns 73 in 2024.
Two Options
This person has two options for his first RMD.
The RMD for 2024, his first, must be withdrawn during 2024 (see option 1 in the table), OR – only for his first RMD – he can wait until the beginning of 2025 (see option 2 in the table). If takes option 2, he must withdraw his first RMD (the RMD for 2024) by April 1, 2025. Again, that’s the IRA owner’s option.
Two RMDs in 2025
If IRA owner takes his 2024 RMD in 2025, he will have two RMDs in 2025, one for 2024 and one for 2025. And, he’ll have to pay taxes on both withdrawals (2024 and 2025 RMDs) on his 2025 tax return. RMDs are normally taxed at ordinary income tax rates.
Again, if you wait to take your first RMD until the beginning of the following year (by April 1, your RBD), you will be taking two RMDs that year – one for the previous year and one for the current year.
After that, you have no options: RMDs for a particular year must be withdrawn from the retirement account during that calendar year.
To repeat, after the first RMD, all subsequent RMDs must be taken before December 31 of the year in question. This applies to all first-timers, no matter when they were born.
A Wrinkle
Everything we’ve been discussing applies to traditional IRAs and other tax-deferred retirement accounts — with an exception for 401(k)s.
If you have a 401(k) and are still working, you may benefit from an exception to these rules that applies to your 401(k) (not IRAs). This exception is available if you are not a 5% or more owner of the company that sponsors the 401(k).
You also need to know that there are no RMDs for owners of Roth IRAs. Roth 401(k)s do have RMDs, but they are not subject to income taxes. Changes are coming for Roth 401(k)s, a subject I’ll write about in another post.
Talk with Your Tax Adviser
This is where I always chime in with “Don’t do anything that relates to RMDs without checking with your tax adviser.” RMDs are a moving target, and they are complicated. You don’t want to get things wrong because of tax consequences and penalties – the subject of my next post.
Questions?
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