SECURE Act 2.0 Shakes Up Required Minimum Distribution Rules

The Setting Every Community Up for Retirement Enhancement (SECURE) Act 2.0 was included as part of the Consolidated Appropriations Act, 2023 that was signed into law just before the new year and builds on the Securing a Strong Retirement Act and Enhancing American Retirement Now Act that did not make it through Congress. The law incorporates provisions from both bills and addresses an array of areas that make major changes to retirement planning, including changes to the rules for required minimum distributions (RMDs).

SECURE Act 2.0 age increases age requirements for RMDs

As part of an update in the first SECURE Act, taxpayers were required to take RMDs (and pay taxes on them) from traditional IRAs beginning at age 72.

SECURE Act 2.0 raises that age in two stages.

Under SECURE 2.0, IRA owners, retired employer plan members, and five percent owners will not have to take RMDs until age 73 (for those turning 72 after 2022) and age 75 (for those reaching age 74 in 2032). The two-stage increase allows taxpayers more time before taking their required distributions and paying taxes on them, allowing for more time to plan and reduce taxable income.

Reduced penalty for not taking RMDs

Prior to SECURE 2.0, taxpayers were subject to a 50% excise for failing to take RMDs. Now the penalty for not taking RMDs has been reduced to 25% and could be dropped to 10% if rectified in a timely manner.

It’s worth noting that in the recent past the IRS has been fairly lenient on the 50% penalty, allowing taxpayers self-correction to avoid the steep penalty. With explanation, whether administrative, hardships, illness, COVID, or deaths, taxpayers were usually given an extra 60 days to remedy the situation without penalty. With the penalty halved, there is potential for a less lenient IRS when it comes to those failing to take their RMDs.

Be mindful of the rules as they apply to your accounts

Despite the changes to the age requirements and the reduction of the penalty for failure to take your RMDs, there are still specific rules that apply to required minimum distributions from various accounts.

Those with multiple accounts carrying RMD requirements may have different options, depending which types of accounts you hold.

Evaluate your retirement accounts with a qualified tax professional to ensure that you are in compliance with all of your accounts and avoid any penalties associated with RMDs.