New RMD Rules: Starting Age, Penalties, Roth 401(k)s, and More

Age When RMDs Are First Required

As it stands right now, you must start taking RMDs from 401(k) accounts, traditional IRAs, and similar retirement savings accounts (other than Roth IRAs) in the year you turn 72 (although you have until April 1 of the following year to take your first RMD). However, the SECURE 2.0 Act eventually pushes the age for starting RMDs to 75.

There's a two-step process under the SECURE 2.0 Act for increasing in the age when RMDs become necessary. Step 1: Beginning in 2023, the age to start taking RMDs jumps from 72 to 73. Step 2: Beginning in 2033, it creeps up again to 75.

RMD Penalties

There are steep penalties for failing to take an RMD. If you miss an RMD or don't take enough out of your retirement account, you'll be hit with a 50% excise tax on the distribution shortfall. There is some penalty relief available, though. You may be able to avoid the additional tax if your failure to take an RMD was due to "reasonable error" (e.g., a serious illness) and you withdraw the necessary amount from your retirement account quickly. To ask for a penalty waiver, submit Form 5329 (opens in new tab) to the IRS as instructed and attach a statement explaining why you didn't take your RMD. The IRS will notify you if your request is rejected.

The current 50% tax is one of the heaviest penalties in the entire tax code, so it's no wonder legislators want to bring it down. The SECURE 2.0 Act reduces the penalty to 25% in all cases. In addition, the penalty drops down to 10% if you take the necessary RMD by the end of the second year following the year it was due. So, for example, if you fail to take an RMD due in 2022, the penalty is knocked down to 10% if you withdraw the necessary funds by December 31, 2024. These penalty-reduction provisions apply beginning in 2023.

For some seniors, the SECURE 2.0 Act will also delay the start of the statute of limitations for assessing the penalty. For people who aren't required to file an income tax return for the tax year in question, the three-year limitations period starts on the date that an income tax return would have been due (excluding any extensions), instead of the date a tax return for the year is actually filed, which can be later than the normal due date. By starting the clock sooner, some people might avoid the penalty if the IRS is slow in assessing it.

RMDs for Roth 401(k) Accounts

There are no RMDs for Roth IRAs. However, RMDs are currently required for Roth 401(k) accounts. You can get around the Roth 401(k) RMD rules by rolling over the money into a Roth IRA. But watch out for the Roth IRA five-year rule – if you're not careful, you may have to wait five years to pull your money out of the Roth IRA.

The SECURE 2.0 Act does away with the need to roll over funds from a Roth 401(k) to a Roth IRA. Instead, as with Roth IRAs, Roth 401(k) accounts won't be subject to the RMD rules before the account holder dies. (Post-death minimum distribution rules, which also apply to Roth IRAs, still apply.) This change generally kicks in starting in 2024; however, an exception applies to RMDs required before 2024 but not required to be paid until January 1, 2024, or later.

Annuities and RMDs

The SECURE 2.0 Act addresses a few issues related to the use of annuities with retirement savings accounts. For instance, if a retirement account includes an annuity, the account was split under prior law between the part holding the annuity and the part that doesn't for purposes of applying the RMD rules. This could result in higher RMDs. The SECURE 2.0 Act allows you to combine distributions from both parts when calculating your annual RMD amount.

In addition, to help make annuities a more attractive component of retirement plans, the SECURE 2.0 Act allows the following payments if certain requirements are satisfied:

• Annuity payments that increase at least annually up to 5% per year;
• Lump sum payments that result in a shortening of the payment period with respect to an annuity or a full or partial commutation of the future annuity payments;
• Lump sum payments that accelerate the receipt of annuity payments that are scheduled to be received within the next 12 months;
• Payments "in the nature of a dividend" or similar distribution; and
• Final payments upon death that don't exceed the total amount of consideration paid for the annuity payments, minus the aggregate amount of prior distributions or payments from or under the contract.

Finally, the SECURE 2.0 Act boosts the use of qualifying longevity annuity contracts (QLACs). Generally, with a QLAC, you can invest up to $130,000 (2022 amount) or 25% of a retirement account, whichever is less, and shield those funds from RMDs. The SECURE 2.0 Act repeals the 25% limit and bumps the dollar amount up to $200,000 (adjusted for inflation each year). It also clarifies that (1) survivor benefits can be paid following a divorce, and (2) an employee has 90 days from the purchase date to rescind a QLAC.

RMDs for Surviving Spouses

Special rules currently exist for determining when a surviving spouse must start taking RMDs from an inherited retirement account. One of those rules states that, if an account holder dies before RMDs are required and his or her surviving spouse is the beneficiary (and doesn't change that status), RMDs from the inherited account aren't required until the year in which the deceased account holder would have reached age 72.

The SECURE 2.0 Act tweaks this rule by also allowing the surviving spouse to be treated as the deceased account owner for RMD purposes starting in 2024. In some cases, this will allow the surviving spouse to delay taking RMDs from the inherited account – e.g., if the surviving spouse is younger than the deceased spouse.

The surviving spouse will have to elect this treatment according to procedures the IRS will have to establish, and the election will be irrevocable. The surviving spouse will also have to notify the account administrator.

QCDs Used to Lower RMDs

Money donated to charity through a qualified charitable distribution (QCD) counts towards your RMD. So, for charitable minded seniors, QCDs are a great way to reduce the amount of money you otherwise have to withdraw from an IRA. However, QCDs are capped at $100,000 per year…and that amount doesn't go up each year.

The SECURE 2.0 Act allows the $100,000 limit to be adjusted annually for inflation (rounded to the nearest $1,000). The adjustments will begin in 2024. In addition, starting in 2023, a one-time QCD of up to $50,000 to charities is allowed through certain charitable remainder annuity trusts, charitable remainder unitrusts, or charitable gift annuities.