SECURE 2.0 Changes RMD Start Date Again

The successor “SECURE Act 2.0” once again changed the rules governing the required beginning date (RBD)—or the date at which retirement savers must begin taking distributions from traditional retirement plans. On their face, the changes seem relatively simple. In reality, the combination of the original SECURE Act and SECURE 2.0 created a system where different clients must begin taking retirement plan distributions at different ages. That, in turn, creates a challenge for advisors who, under prior law, knew that each client was subject to the same required beginning date. It therefore becomes important for advisors to familiarize themselves with the new changes to make sure they’re providing correct advice for clients who are approaching their RBD now and in the coming years.

SECURE 2.0 Retirement Changes

Taxpayers who contribute pre-tax dollars to 401(k)s, 403(b)s and IRAs are not entitled to reap the benefits of tax deferral forever. The law requires them to begin depleting their account funds—and paying the associated taxes—once they reach retirement age. What constitutes “retirement age”, of course, varies from client to client. The law, however, contains a date at which most taxpayers must begin taking distributions regardless of whether they have actually retired.

The original SECURE Act increased the required beginning date (RBD), or the age at which taxpayers must begin taking distributions from traditional retirement accounts, from age 70.5 to age 72. Under the original SECURE Act, the account owner must take an initial distribution by April 1 of the year following the year they reach age 72.

The successor SECURE Act 2.0 Act will gradually increase the age at which required minimum distributions (RMDs) from traditional retirement accounts must begin from 72 in 2022 to 73 in 2023 and up to age 75 by 2033. The change applies to company plans, IRAs, SEP IRAs and SIMPLE IRAs (but not to Roth IRAs, which are not subject to a lifetime RMD rule).

It’s important to note that the SECURE Act 2.0 does not provide retroactive relief. Taxpayers who reach age 72 in 2023 will continue to be subject to the existing rules—meaning that they will be required to take their first RMD by April 1, 2024 and their second distribution by December 31, 2023.

What is My Client’s RBD?

Any given client’s required beginning date will depend on their date of birth. Taxpayers who were born on or before June 30, 1949 will be subject to the original, pre-SECURE Act RBD. That means those clients should have already begun taking distributions from retirement accounts in the year after they turned 70.5

Clients who were born after June 30, 1949, but before January 1, 1951 are subject to the age-72 rule under the original SECURE Act. Those taxpayers are not entitled to stop RMDs and take advantage of the new, increased required beginning ages. In other words, they should not make any changes to their existing RMD schedule.

Clients who are born on or after January 1, 1951 are subject to SECURE Act 2.0’s age-73 rule. These taxpayers will not be required to begin taking distributions until April 1 of the year after they reach age 73.

Taxpayers who were born on or after January 1, 1960 use age 75 as their required beginning date (assuming that no additional changes are made between now and 2033, which, of course, is far from certain).

Reduction in Penalty

SECURE 2.0 also reduces the penalty for missed RMDs. Under prior law, clients who miss required minimum distributions (RMDs) from traditional retirement accounts have been subject to a penalty equal to 50 percent of the amount of the missed RMD.

The SECURE Act 2.0 reduces that penalty amount to 25 percent of the missed RMD effective beginning in 2023. The penalty amount is further reduced to 10 percent of the missed RMD if the client takes all of their missed RMDs and files a tax return paying the required tax and penalty amount before the earlier of (1) receiving a notice of assessment of the RMD penalty tax or (2) two years from the year of the missed RMD.

Conclusion

In the end, it’s important to remember that no clients will take their first retirement account RMDs in 2023. Clients need only look to their date of birth in order to determine the age at which they must begin taking distributions from traditional retirement accounts.

Your questions and comments are always welcome. Please post them at our blog, AdvisorFYI, or call the Panel of Experts.