The SECURE Act 2.0 legislation, included in the $1.7 trillion appropriations bill passed late last year, builds on changes established by the original Setting Every Community Up for Retirement Enhancement Act (SECURE 1.0) enacted in 2019. Among these changes are rules that apply to required minimum distributions (RMDs) from IRAs and employer retirement plans. Here's what you need to know to ensure you get the most out of your hard-earned retirement funds.
What are RMDs?
Required minimum distributions, sometimes referred to as RMDs or minimum required distributions, are amounts the federal government requires you to withdraw annually from traditional IRAs and employer retirement plans after you reach a certain age, or in some cases, retire. You can withdraw more than the minimum amount from your IRA or plan in any year, but if you withdraw less than the required minimum, you will be subject to a federal tax penalty.
These lifetime distribution rules apply to traditional IRAs, Simplified Employee Pension (SEP) IRAs, and Savings Incentive Match Plan for Employees (SIMPLE) IRAs, as well as qualified pension plans, qualified stock bonus plans, and qualified profit-sharing plans, including 401(k)s. Section 457(b) plans and Section 403(b) plans are also generally subject to these rules. If you are uncertain whether the RMD rules apply to your employer plan, you should consult your plan administrator or a tax professional.
How the new legislation changes RMD rules
1. The RMD age increased (and will continue to!)
Prior to the passage of the SECURE Act 1.0 in 2019, retirement plan holders who had reached age 70 ½ were generally required to start taking RMDs. The 2019 legislation raised this age to 72 for those who had not yet reached age 70½ before January 1, 2020.
The SECURE Act 2.0 raises the trigger age for RMDs even higher to age 73 for anyone who reaches age 72 after 2022. It increases the age again, to 75, starting in 2033. Use the chart below to help you understand when you must start taking RMDs based on your date of birth:
Date of birth
Age to start taking RMDs
|Before July 1, 1949
|July 1, 1949 through 1950
|1951 to 1959
|1960 or later1
Generally, your first distribution must be taken by April 1st of the year following the year you reach RMD age. Subsequent required distributions must be taken by the end of each calendar year. So if you wait until April 1st of the year after reaching RMD age, you'll have to take two required distributions during that calendar year.
If you continue working past your RMD age, you may delay RMDs from your current employer's retirement plan until after you retire.
2. The RMD penalty tax decreased
The penalty for failing to take a required minimum distribution is steep – historically, a 50% excise tax on the amount by which you fell short of the required distribution amount.
The SECURE Act 2.0 reduces the RMD tax penalty to 25% of the shortfall, effective this year. Still steep, but better than 50%!
Also effective this year, the Act establishes a two-year period to correct a failure to take a timely RMD distribution, with a resulting reduction in the tax penalty to 10%. Basically, if you self-correct the error by withdrawing the required funds and filing a return reflecting the tax during that two-year period, you can qualify for the lower penalty tax rate.
3. Lifetime RMDs from Roth employer accounts eliminated
Roth IRAs have never been subject to lifetime RMDs. A Roth IRA owner does not have to take RMDs from the Roth IRA while he or she is alive. But distributions to beneficiaries are required after the Roth IRA owner's death.
The same has not been true for Roth employer plan accounts, including Roth 401(k) and Roth 403(b) accounts. Plan participants have been required to take minimum distributions from these accounts once they reach their RMD age. But they can avoid the requirement by rolling over the funds in the Roth employer plan account to a Roth IRA.
Beginning in 2024, the SECURE Act 2.0 legislation eliminates the lifetime RMD requirements for all Roth employer plan account participants, even those participants who already commenced lifetime RMDs. Note that any lifetime RMD from a Roth employer account attributable to 2023, but payable in 2024, is still required.
4. Additional option for spouse beneficiaries of employer plans
The SECURE Act 2.0 legislation provides that, beginning in 2024, when a participant has designated his or her spouse as the sole beneficiary of an employer plan, a special option is available if the participant dies before RMDs have commenced.
This provision will permit a surviving spouse to elect to be treated as the employee, similar to an existing provision that allows a surviving spouse who is the sole designated beneficiary of an inherited IRA to elect to be treated as the IRA owner. Generally, this would allow a surviving spouse the option to delay the start of RMDs until the deceased employee would have reached the appropriate RMD age, or until the surviving spouse reaches the appropriate RMD age – whichever is more beneficial. This will also generally allow the surviving spouse to utilize a more favorable RMD life expectancy table to calculate distribution amounts.
5. New flexibility regarding annuity options
Starting in 2023, the SECURE Act 2.0 legislation makes specific changes to the RMD rules that allow for some additional flexibility for annuities held within qualified employer retirement plans and IRAs. Allowable options may include:
- Annuity payments that increase by a constant percentage, provided certain requirements are met
- Lump-sum payment options that shorten the annuity payment period
- Acceleration of annuity payments payable over the ensuing 12 months
- Payments in the nature of dividends
- A final payment upon death that does not exceed premiums paid less total distributions made
These are just a few of the many provisions in the SECURE Act 2.0 legislation. The rules regarding RMDs are complicated. While the changes described here provide significant benefit to individuals, the rules remain difficult to navigate and you should consult a tax professional to discuss your individual situation.
It is important to understand that purchasing an annuity in an IRA or an employer-sponsored retirement plan provides no additional tax benefits beyond those available through the tax-deferred retirement plan. Qualified annuities are typically purchased with pre-tax money, so withdrawals are fully taxable as ordinary income, and withdrawals prior to age 59½ may be subject to a 10% federal tax penalty.
Meet with a financial advisor to discuss how the Secure Act 2.0 may impact your retirement plan. As a member of General Electric Credit Union, you’re entitled to a no-cost consultation, available through CUSO Financial Services, L.P. (CFS).2 Visit us online to learn more about our team of advisors and how they may be able to assist you.