Retirement plan accounts (other than Roth accounts, that is) are tax deferred, but not forever. At a certain age, every retirement plan owner or participant must begin to receive annual taxable distributions. The amount of any particular required minimum distribution, or RMD, depends on the size of the account and the life expectancy of the account owner/participant.
SECURE 2.0 adjusted the timing of the required beginning date, and it altered certain other RMD rules. This article describes many of these changes, and reviews some of the RMD basics, for the following types of retirement accounts:
- Traditional individual retirement accounts (IRAs)
- Roth IRAs for death beneficiaries
- IRA-based plans such as SEPs, SARSEPs, and SIMPLE IRAs
- Profit sharing and 401(k) plans
- 403(b) plans
Review of RMD Basics
The Non-Compliance Tax Penalty is Paid by the Account Owner/Participant
As a preliminary matter, it is important to keep in mind that the income tax liability for RMDs is not born by the plan administrator or custodian but by the individual account owner, participant or beneficiary (here sometimes referred to collectively as the “owner/participant”). While a plan trustee or administrator may take on reporting and distribution duties under their service contract, the actual tax liability lies with the owner/participant. Therefore, an owner/participant must ensure that, by their required beginning date, they withdraw and pay income tax on the correctly calculated RMD; and they must continue to take RMDs annually thereafter.
The penalty for failure to withdraw the full amount of the RMD by the due date is payment of an excise tax equal to 25% of the RMD amount (lowered from the 50% rate effective before SECURE 2.0). The penalty can be reduced to 10% if the RMD is timely corrected within two years, and if the account owner files a form, and an adequate explanation for the shortfall, with their federal tax return for the year in which the full amount of the RMD was required. The penalty may be waived completely if the account owner establishes that the shortfall in distributions was due to reasonable error and that reasonable steps are being taken to remedy the shortfall.
Permitted Delays, for Participants in a non-IRA Plan
Participants in an employer plan can delay their required beginning date until the year in which they retire, unless they are a 5% owner of the business sponsoring the plan. This option does not apply to owners of IRAs, SARSEPs, SEPs or SIMPLE IRAs.
Note that the owner/participant may withdraw more than the minimum required amount, but any amounts above the RMD amount that are withdrawn in one year may not be applied to an RMD for a future year. Nor may they be rolled over into another tax-deferred account, which makes sense given that the purpose of RMDs is to provide the government tax revenue.
It is usually part of the services of the account custodian to calculate the RMD amount and to prepare the annual 1099-R reporting. The RMD withdrawals are reported as includible income on the owner/participant’s 1040, except for any part that has been taxed previously or that can be received tax-free, such as qualified distributions from designated Roth accounts.
The Updated Schedule of Required Beginning Dates for all Account Types
Since SECURE 2.0 was passed last December, the RMD beginning age has been raised, and will continue to go up, in stages, resulting in the following updated schedule for recent and upcoming years, and which applies to all types of retirement accounts:
- Through 2019 – age 70½
- For 2020 through 2022 – age 72
- Beginning January 1, 2023 through 2032 – age 73
- Beginning January 1, 2033 – age 75
For the first RMD only, there is a brief grace period, in that the actual required beginning date is April 1 of the year following the year in which the owner/participant reaches RMD age.
For example – If the owner/participant was born in 1950, they turned 72 in 2022. Accordingly, their first RMD was required to be paid to them no later than April 1, 2023. A person born in 1951 was only 71 years old in 2022 and therefore not required to start receiving an RMD until they turn 73 in 2024, with a required beginning date of April 1, 2025.
However, the due date for the second RMD is December 31 of the same calendar year as the required beginning date. Subsequent RMDs are also required to be taken within the applicable tax year.
Rules that Vary Depending on the Type of Account
Designated Roth Accounts in a 401(k) or 403(b) Plan
For 2022 and 2023, Roth accounts inside a 401(k) or 403(b) plan continue to be subject to the RMD rules. However, for 2024 and later years, RMDs will no longer be required from designated Roth accounts in an employer plan.
The New 10-Year Rule for Inherited Retirement Accounts
For defined contribution plan participants or IRA owners who die after December 31, 2019, (with a delayed effective date for certain collectively bargained plans), the entire balance of the deceased participant’s account must be distributed within ten years. There’s an exception for a surviving spouse, a child who has not reached the age of majority, a disabled or chronically ill person, or a person not more than ten years younger than the employee or IRA account owner. The new 10-year rule applies regardless of whether the owner/participant dies before, on, or after the required beginning date.
For owner/participants who died before January 1, 2020 and who had not yet reached their RMD age (age 70½), the entire amount of the owner’s benefit generally must be distributed to the beneficiary who is an individual—
- Within 5 years of the end of the year following the year of the owner/participant’s death,
- Over the life of the beneficiary starting by the end of the year following the year of the owner/participant’s death.
Owners of Multiple IRAs or 403(b) Accounts
An IRA owner must calculate the RMD separately for each IRA they own, but can withdraw the total amount from one or more of the IRAs. Similarly, a 403(b) contract owner must calculate the RMD separately for each 403(b) contract they own, but can take the total amount from one or more of the 403(b) contracts.
However, RMDs required from other types of retirement plans, such as 401(k) and 457(b) plans, must be taken separately from each of those plan accounts.
While the tax burden for getting RMDs wrong falls on the participant, it is important for plan sponsors, custodians, and service providers to get up to speed on these new rules to avoid costly correction processes that may become customer service complaints from irate owners/participants.
For much greater detail, including FAQs, charts, guides and worksheets, see the IRS website at Retirement Topics — Required Minimum Distributions (RMDs) | Internal Revenue Service (irs.gov).