Key RMD Changes In The SECURE Act 2.0 You Should Know

It’s hard for people to keep up with the more than 100 changes the SECURE Act 2.0 made in retirement plans and related tax code provisions. Here’s a summary of the key changes in required minimum distributions (RMDs) in the law that was enacted at the end of 2022.

The beginning age for RMDs of owners of traditional IRAs is transitioning in stages from 70½ (in effect when the original SECURE Act was enacted at the end of 2019) to 75 for those born in 1960 or later.

Anyone who turned 72 in 2022 or earlier follows the old rules. Those who turned 72 in 2022 have to take their first RMD no later than April 1, 2023. If you were taking RMDs before 2022, continue taking RMDs on the schedule you had in place.

Those who turn 72 in 2023 through 2033 (born from 1951 to 1959) have 73 as their RMD starting age. They have to take the first RMD by April 1 of the year after they turn 73. It’s usually best to take that first RMD in the year you turn 73 instead of waiting until the following year.

Anyone born in 1960 or later has 75 as the RMD starting age. They will have to take their first RMDs by April 1 of the year after turning 75. But, again, in most cases it will be better to take the first RMD in the year they turn 75.

There is no change in the RMDs for beneficiaries who inherited traditional and Roth IRAs. Most of them follow the 10-year rule created in the original SECURE Act.

A welcome provision in the SECURE Act 2.0 is the significant reduction in the penalty for not taking an RMD. Since 1974, the penalty has been 50% of the amount that should have been distributed but wasn’t.

The penalty is lowered to 25% and can be reduced to 10% if the IRA owner makes up the RMD in a timely manner. The law says this means the full amount is distributed by the earlier of the second year after the RMD was missed or before the IRS assesses a penalty.

The lower penalty applies to all people who have to take RMDs, including those who had to begin RMDs at earlier ages under the old rules.

The IRS was fairly generous in the past in waiving the 50% penalty as long as the distribution eventually was made and a reasonable excuse was offered for the delay. Reasonable excuses included confusion over the rules, health problems, a death in the family, and receiving incorrect advice.

The IRS still can waive the lower penalty when a reasonable excuse is offered, but it’s not clear if the IRS will be as lenient now that the penalty is lower than 50%.

A late RMD is reported and a request for waiver of the penalty is made on Form 5329, which is filed with your income tax return.

The SECURE Act 2.0 also reduces the statute of limitations on the RMD penalty.

Previously, the three-year statute of limitations on the RMD penalty didn’t start running until the IRA owner filed Form 5329. If the taxpayer didn’t file the form, there was no statute of limitations, evenif the taxpayer didn’t know about this obligation, the three-year statute of limitations didn’t apply. The taxpayer could be assessed the penalty years after the RMDs was missed, and the IRS did that from time to time.

Under the SECURE Act 2.0, the statute of limitations begins running when the Form 1040 is filed for the year the RMD was supposed to be taken, even if Form 5329 isn’t included with the 1040.

The SECURE Act 2.0 also eliminates the RMD obligation for original owners of Roth 401(k) accounts. Under the old rules, Roth 401(k) account owners had to take RMDs just as the owners of traditional 401(k) accounts do. This was a major difference between Roth IRAs and Roth 401(k)s, because Roth IRA owners never had to take RMDs during their lifetimes.

The elimination of the RMD requirement for Roth 401(k) owners doesn’t take effect until 2024.