Recent retirement savings legislation (e.g., the SECURE 2.0 Act) has created confusion about when people must begin taking required minimum distributions (RMDs) from tax-deferred retirement savings accounts. (RMDs are the minimum amounts you must withdraw from certain retirement accounts each year once you reach a certain age.)
New RMD rules
For example, a few years ago, the SECURE Act raised the age for taking RMDs from 70.5 to 72. But last year, when the SECURE 2.0 Act became law, the RMD age moved to 73. That raised questions about who could or couldn’t delay their RMDs until the following year.
Confusing things even more, the IRS delayed rules for some inherited IRA RMDs. The agency also waived penalties for failing to take certain RMDs. So, for 2023, some retirees wonder whether and when they must take required minimum distributions.
RMD age by birth year
Thankfully, to simplify things, there is a relatively straightforward guideline for some 2023 RMDs. That’s because the age at which you must start taking required minimum distributions is determined by your birth year.
- Essentially, if you were born in 1950 or earlier, you must take required minimum distributions this year (2023).
- However, if you were born on or after January 1, 1951, you are not obligated to take RMDs in 2023.
Note: Accounts subject to RMD rules include employer-sponsored retirement plans including, including profit-sharing plans, 401(k) plans, 403(b) plans, and 457(b) plans. Other tax-deferred retirement accounts, such as traditional IRAs, SEPs, and SIMPLE IRAs, are also subject to RMDs.
Do Roth IRAs have RMDs? But remember that inherited IRAs have their own set of complicated rules. Meanwhile, Roth IRA accounts are not subject to RMD requirements until after the account owner dies. And beginning in 2024, RMDs won’t be required for designated Roth 401(k) accounts. (However, 2023 RMDs due by April 1, 2024, are still required.)
When do RMDs start?
- If you reach age 72 in 2023, your first RMD can be delayed until age 73. So, the first RMD (for 2024) is due April 1, 2025.
- If you were age 72 in 2022, the prior RMD rule applies. That means your first RMD was due April 1, 2023, and your second RMD is due soon, i.e., Dec. 31, 2023. (The RMD amount would be based on your account balance on Dec. 31 of last year, 2022).
It's important to note that your first RMD can wait until the 1st of April, the following year. That means that if you turn 73 this year (2023), you may delay your RMD until April of next year (2024). That might give you time to align the distribution with your financial situation, but it can result in two RMDs in a year.
However, remember that subsequent RMDs must be completed by December 31 of a given year.
How are RMDs taxed?
Required minimum distributions are generally taxed as ordinary income in the year they are taken. So, RMDs can increase your taxable income and potentially push you into a higher federal income tax bracket.
Additionally, increased income from required distributions can affect your eligibility for some tax credits and deductions and impact the amount you pay in Medicare Part B and D premiums.
What can you do? Given the potential impacts of RMD income and recent legislative changes in SECURE 2.0, it's essential to stay informed and seek advice from financial experts to ensure compliance with the latest regulations. Also keep in mind that failing to take RMDs can result in IRS penalties.
Consult your financial advisor or a tax professional to plan your retirement account distributions and make informed decisions on withdrawals that optimize your financial situation in retirement while minimizing tax implications.
