In December 2022, the U.S. Congress passed the SECURE Act 2.0 which included several changes that impact retirement, including changes to when retirees must take distributions.
Retirement planning is a crucial part of financial security, and understanding the rules and regulations of your retirement account is key. A required minimum distribution (RMD) is the amount of money that must be withdrawn from an employer-sponsored retirement plan, traditional IRA, SEP or SIMPLE individual retirement account (IRA) by owners and qualified retirement plan participants of retirement age.
In 2023, the age at which you must begin taking RMDs has changed to 73 years old. It’s important to understand the new rules and regulations surrounding this change in order to make informed decisions about your financial future.
What Does This Mean for Me?
The changes implemented by SECURE (Setting Every Community Up for Retirement Enhancement) 2.0 require those aged 73 and up to start withdrawing from their retirement account no later than April 1, following the year they reach age 73.
Not adhering to this new rule can result in serious penalties—upwards of 50 percent—of the total amount due being assessed on any account holders who do not comply. The penalty also applies if you withdraw too much in a given year as well, so it’s important to calculate your RMD accurately each year.
In addition to this change, starting in 2024 holders of designated Roth 401(k) accounts will no longer be required to take RMDs during their lifetime; however all other accounts will still be subject to these requirements. This means that if you are able, converting your 401(k) into a Roth 401(k) now may be beneficial for you down the road as it eliminates any need for you to take an RMD later in life. Of course, it’s important that you consult with a financial professional before making any decision about converting your existing 401(k).
How Can I Calculate My Required Minimum Distribution?
Calculating your required minimum distribution can seem daunting at first but there are resources available online that can help make the process easier for you. The IRS website provides a helpful worksheet that takes into account factors such as age and account balance when determining how much money must be withdrawn each year, as well as various other resources regarding RMDs such as FAQs and information sheets outlining best practices when withdrawing from an account with an RMD requirement attached. There are also private companies that offer financial advisors specializing in retirement planning who can assist with calculating and managing your required minimum distribution on an ongoing basis if needed.
The changes made by SECURE 2.0 have far-reaching implications for many individuals already retired or nearing retirement age who have employer-sponsored plans or traditional IRAs and need to meet their annual withdrawal requirement beginning April 1st following their 73rd birthday or face serious consequences for not doing so correctly. It is therefore essential for anyone affected by these changes to familiarize themselves with them now so they can make informed decisions about their retirement planning going forward that best suit their current situation and long-term goals. Knowing what options are available when calculating an annual withdrawal amount using tools such as those offered by the IRS or engaging with the services of a qualified financial advisor can help ensure compliance without sacrificing long-term growth potential within an individual’s personal portfolio investments throughout their lifetime.
The SECURE Act 2.0 has made the headlines in loads of publications, so here are some additional resources that we recommend.
- Required Minimum Distributions (RMDs) | IRS.
- Secure Act 2.0: How new legislation could change the way you save for retirement | US Bank.
- SECURE 2.0 Act Changes 401(k), IRA, Roth, Other Retirement Plan Rules | Kiplinger.
- Required Minimum Distribution (RMD): Definition and Calculation | Investopedia.
- ‘Secure 2.0’ clears Congress as part of omnibus appropriations bill, will bring more changes to U.S. retirement system | CNBC.
- Things the SECURE 2.0 Act changes about retirement | Mint Life.
- The Downside of Delaying RMDs | Kiplinger.
- New RMD Rules: Starting Age, Penalties, Roth 401(k)s, and More | Kiplinger.
We also identified several RMD calculators which you may find helpful.
- Required Minimum Distribution Worksheets | IRS.
- Required Minimum Distribution Calculator | SEC.
- Calculate your RMD | Charles Schwab.
- Required minimum distribution calculate your earnings and more | Bankrate.
- Required Minimum Distribution (RMD) Calculator | Ameritrade.