Understanding Required Minimum Distributions (RMDs) and Recent Changes in Rules

Are you turning 70 years old this year and wondering about required minimum distributions (RMDs) from your IRA? You’re not alone. The rules surrounding RMDs have changed over the years, leading to confusion for many individuals. Let’s break down the key points you need to know about RMDs to help you navigate this aspect of retirement planning.

First and foremost, it’s essential to understand the recent changes to RMD rules. The Tax Reform Act of 1986 initially set the age to begin taking RMDs at 70 1/2 years old. However, the SECURE Act of 2019 increased the required RMD starting age to 72 years old, beginning in 2020. Additionally, the CARES Act of 2020 waived RMDs for IRAs and retirement plans for 2020. Looking ahead, the SECURE Act 2.0 of 2022 will further increase the RMD beginning age to 73 years old for individuals turning 72 in 2023 and 75 years old for those turning 74 after 2032.

These changes apply to various retirement accounts, including traditional IRAs, SEP IRAs, SIMPLE IRAs, 401(k) plans, 403(b) plans, and more. It’s crucial to stay informed about these changes to ensure you comply with the current regulations.

One key distinction to note is the difference in RMD requirements between IRAs and employer-sponsored retirement plans. While IRA owners must take RMDs from their IRA beginning at age 73, even if they are still working, employed 401(k) investors can delay RMDs until they retire. This difference presents an opportunity for those working later in life to potentially defer RMDs by rolling their IRA into their employer’s retirement plan.

Calculating your RMD is relatively straightforward, with the formula based on the value of your IRA at the end of the previous year divided by the distribution period from the IRS’s “Uniform Lifetime Table.” Your IRA trustee or custodian should calculate your RMD for you, but it’s always wise to double-check their calculations.

Missing an RMD or failing to take a full distribution can result in a special excise tax, so it’s crucial to stay on top of your RMD requirements. If you do miss an RMD, you can correct the error by distributing the missed RMD and filing the necessary forms with the IRS.

In conclusion, understanding RMD rules and staying informed about changes is essential for managing your retirement accounts effectively. By familiarizing yourself with the current regulations and seeking guidance from financial professionals when needed, you can navigate the complexities of RMDs with confidence.