For the second time in the last few years, the age when required minimum distributions (RMDs) kick in is on the rise. Starting in 2023, Americans will not have to begin taking RMDs until they turn 73.
The change is a result of the passing of the SECURE 2.0 Act, which was signed into law at the end of 2022. The required age had previously been set at 72.
Required minimum distributions are a government-mandated part of employer-sponsored retirement plans like 401(k)s, as well as various IRA plans. An RMD sets the age when you must begin taking money out of your account and offers a calculation of how much money must be withdrawn.
Americans who fail to begin withdrawing their required minimum distribution at the required age or who do not take out the required amount are subject to a steep tax penalty.
RMD Changes in the SECURE 2.0 Act
The main and most immediate change from the passing of the SECURE 2.0 Act is the raising of the RMD age from 72 to 73. This will give Americans one additional year before they must start making withdrawals from their retirement accounts.
On top of raising the required age, the SECURE 2.0 Act also lowered the penalties for those who fail to withdraw their required minimum distributions.
According to the Internal Revenue Service, the penalty for failing to withdraw the RMD by its due date was a 50% tax on the amount not withdrawn. Starting in 2023, that penalty was dropped to 25% and can be further decreased to 10% if the mistake is corrected in a timely manner.
The act also laid the groundwork for the RMD age to rise again in a decade. Starting in 2033, it will be set at 75 years old. The RMD age had previously been set at 70 1/2 before being raised to 72 by the original SECURE Act, which was passed into law in 2019.
How Americans Are Impacted
RMDs require Americans to begin withdrawing money from their retirement accounts by a certain age, with tax penalties for those who do not begin withdrawing by that age or who do not withdraw enough.
The rising age requirement gives Americans the chance to delay making withdrawals from their retirement accounts longer than ever before. RMDs essentially serve to place a time limit on the tax-deferred benefits that people receive when investing in retirement accounts.
The changes in the SECURE 2.0 Act allow Americans to benefit from that tax deferral for a longer period and face significantly less of a penalty if they do miss out on an RMD.
But the change is not retroactive.
Anyone who turned 72 on or before Dec. 31, 2022 is not eligible to wait until they are 73 to begin taking their RMDs. The previous RMD penalty of a 50% tax on the amount not withdrawn may stilly apply to those who were set to begin taking RMDs last year as well.
RMDs affect all employer-sponsored retirement plans, making them a critical part of retirement planning for millions of Americans. 401(k) plans, 403(b) plans and 457(b) plans are all affected. According to the IRS, plans such as IRAs and SIMPLE IRAs abide by RMD rules as well.
The one exception is a ROTH IRA, which still is affected by RMDs but not until the owner has died and it is inherited by a beneficiary.
