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New RMD rules: What retirees need to know now!
Understand the new rules for Required Minimum Distributions (RMDs) and their impact on Roth accounts starting in 2025.
New RMD rules: What retirees need to know now!
An important innovation for everyone who is or will soon be retired recently caused a stir with the entry into force of the SECURE 2.0 Act. This passed legislative act brings significant changes to the so-called Required Minimum Distributions (RMDs), which are crucial for retirees and the beneficiaries of inherited accounts. Kiplinger reports that the starting age for RMDs in particular has been pushed back, which is a relief for many.
Instead of the current age of 72, retirees must now begin making minimum withdrawals from their traditional IRAs, SEP IRAs or 401(k) accounts at age 73. In addition, anyone who turns 73 in 2024 even has until April 1, 2025 for their first RMD, based on the account balance as of December 31, 2023. The second withdrawal must be made by December 31, 2025, which offers a little more time for planning, he says IRS.
Inherited accounts and new regulations
The SECURE 2.0 Act also impacts inherited accounts. This change particularly affects beneficiaries, who must distribute the entire account balance within ten years from the year of the account holder's death. However, there are exceptions for certain beneficiaries, such as spouses or those who are minors. Schwab emphasizes that you should avoid making mistakes when making withdrawals. This includes missing the deadline for the first RMD, which can lead to severe penalties.
A common misunderstanding concerns the calculation of the amounts to be withdrawn. RMDs must be calculated carefully, as incorrect calculation can lead not only to financial disadvantages, but also to high taxes. An accurate way to determine the RMD is to divide the account balance as of December 31 of the previous year by a life expectancy factor issued by the IRS.
The tax implications
The withdrawals that must be made through RMDs count as taxable income, except for amounts that are tax-free, such as those from Roth accounts. It's important to note that RMDs may not be rolled over into another tax-deferred account. According to the IRS, RMDs can be withdrawn in one lump sum or across accounts, but it is the account holder's responsibility to ensure the correct amounts are withdrawn.
Another point retirees should keep in mind: Failure to withdraw the RMD on time can result in a penalty of up to 25% on the amount not withdrawn. However, anyone who corrects an error within two years only faces a 10% penalty provided they can prove a “reasonable error”.
Since the regulations and tax framework conditions can change constantly, it is advisable to obtain information in good time and, if in doubt, to consult an expert. Whether you are a tax advisor or financial planner, individual advice can help you avoid expensive mistakes and optimally shape your own financial situation.