Guidelines for RMDs look a little different in 2023.
People save for retirement so they will have money to pay for things from bills to entertainment when they no longer work.
Saving through a Roth IRA means the account is funded through after-tax dollars.
With traditional IRAs and 401(k)s, pre-taxed money is added and grows tax-deferred.
Although people fully expect to use this money in retirement, depending on the taxable nature of certain funds, retirees have less control over when money is withdrawn and how much is used.
According to a recent U.S. News & World Report article titled “New RMD Rules for 2023,” the government provides rules for withdraws known as Required Minimum Distributions (RMDs).
RMDs must be taken from certain retirement accounts like 401(k)s and traditional IRAs.
With the signing of the SECURE 2.0 Act, a few changes have been introduced.
First, the age for governing when RMDs must begin was increased.
In 2023, it increased from age 72 to age 73.
In 2033, the age will be raised again to 75.
What does this mean?
Those born between the years 1951 and 1959 will begin to take their RMDs at age 73.
Anyone born in 1960 or later will be able to wait until age 75 to take required minimum distributions.
A little more time is granted for those taking their first RMD, but subsequent distributions must be made every calendar year.
Because required minimum distributions are taxable, you have some choices to make if you turn 72 this year.
You could wait and simply take your first distribution by December 31, 2024 or April 1, 2025.
If you choose to delay until April, you will be taking two taxable RMDs within one tax year.
What factors might impact this decision?
If you are still working or your Social Security income is sufficient to meet your needs, you may benefit from taking RMDs at an older age.
Waiting to take distributions gives your money more time to compound tax-free in your account.
You may also be able to save on the cost of Medicare.
Medicare premiums are tied to income.
Taking distributions from pre-tax retirement accounts will increase income for the year and subsequently raise premiums.
Lowering income by waiting on withdrawals can mean a lower Medicare premium for the year.
Taking requirement minimum distributions early also has its benefits.
Waiting can lead to more taxes as a result of higher distributions later in retirement.
Failing to take RMDs is not an option.
The government has penalties for missed RDMs.
Prior to the SECURE 2.0 Act, the tax penalty was 50 percent of the RMD not withdrawn.
With the passing of the SECURE 2.0 Act, the penalty has been reduced to 25 percent.
If you find and correct the missed withdrawals quickly, the penalty may be reduced to 10 percent, if it can be demonstrated the missed distribution was the result of an error and steps are being reasonably taken to address the problem.
And 2023 will also see changes to qualified charitable distributions.
Owners of accounts who are age 70 ½ and older may take up to $100,000 per year in IRA qualified charitable distributions without owing income tax on the transaction.
These distributions will also qualify as RMDs for the year.
The limit for the charitable distribution has been linked to inflation and may be increased in the future.
People can also make a one-time gift of $50,000 directly to an eligible entity using a charitable remainder annuity trust, charitable remainder unitrust, or a charitable gift annuity.
Although Roth IRAs did not have RMDs prior to the passage of the SECURE 2.0 Act, the exemption now applies to Roth 401(k) accounts.
Understanding these changes to RMDs will help you better navigate strategic withdrawals from retirement accounts.
Reference: U.S. News & World Report (Feb. 10, 2023) “New RMD Rules for 2023”