Understanding RMDs and the Impact of SECURE 2.0

Understanding Required Minimum Distributions (RMDs) is a crucial component of financial planning for retirees and those approaching retirement. RMDs dictate how and when you must begin withdrawing funds from tax-deferred retirement accounts, impacting your taxable income and long-term investment strategy. With the passage of the SECURE 2.0 Act, significant changes have been made to RMD rules, providing new opportunities for retirees to manage their distributions more effectively.

What Are RMDs?

Required minimum distributions (RMDs) are the minimum amounts you must withdraw from your retirement accounts each year. You generally must start taking withdrawals from your traditional IRA, SEP IRA, SIMPLE IRA, and retirement plan accounts when you reach age 73. Participants in a workplace retirement plan (for example, 401(k) or profit-sharing plan) can delay taking their RMDs until the year they retire unless they’re a 5% business owner sponsoring the plan.¹

The purpose of RMDs is to ensure that these tax-deferred funds are eventually taxed, rather than being passed down indefinitely as part of an estate. Retirement plan participants and IRA owners, including owners of SEP IRAs and SIMPLE IRAs, are responsible for taking the correct amount of RMDs on time, every year from their accounts, and they may face stiff penalties for failure to take RMDs.

Key Points to Understand About RMDs

When RMDs Begin: You must take your first required minimum distribution for the year in which you reach age 73. However, you can delay taking the first RMD until April 1 of the following year. If you reach age 73 in 2024, your first RMD is due by April 1, 2025, based on your account balance on December 31, 2023, and your second RMD is due by December 31, 2025, based on your account balance on December 31, 2024.²
Which Accounts Are Subject to RMDs: RMDs apply to traditional IRAs, SEP IRAs, SIMPLE IRAs, and employer-sponsored plans like 401(k)s and 403(b)s. Roth IRAs are exempt from RMDs during the account holder’s lifetime. However, beneficiaries of Roth IRAs and Designated Roth accounts are subject to RMD rules.
How RMD Amounts Are Calculated: Generally, an RMD is calculated for each account by dividing the prior December 31 balance of that IRA or retirement plan account by a life expectancy factor that the IRS publishes in Tables in Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs). Choose the life expectancy table to use based on your situation.³
What are the Tax Implications RMD withdrawals are generally taxed as ordinary income. Failing to take an RMD results in significant penalties. Previously, failing to take an RMD resulted in a stiff 50% excise tax on the amount not withdrawn. However, under SECURE 2.0, the penalty was reduced to 25%.

The Impact of SECURE 2.0 on RMD Rules

In addition to changing the age at which RMDs must begin and lowering the tax penalty, SECURE 2.0 introduced several other changes that affect RMDs. Here’s what retirees and pre-retirees need to know:

Elimination of RMDs for Roth 401(k)s

Before SECURE 2.0, Roth 401(k) account holders were required to take RMDs, unlike Roth IRA owners. However, starting in 2024, Roth 401(k) plans will no longer be subject to RMDs, aligning them with Roth IRAs and making them a more attractive option for tax-efficient retirement planning.⁴

Changes to RMD Calculation for Spousal Beneficiaries

Spouses inheriting retirement accounts have long had more flexibility in taking distributions. SECURE 2.0 introduces additional options that may allow surviving spouses to delay RMDs even further by treating the inherited account as their own.

Qualified Charitable Distributions (QCDs) Adjustments

Qualified Charitable Distributions (QCDs) allow individuals 70 ½ or older to donate up to $100,000 per year directly from an IRA to a charity, thereby satisfying RMD requirements without increasing taxable income.⁵ SECURE 2.0 indexes the QCD limit to inflation, meaning it will rise over time and allows a one-time, $50,000 QCD to a split-interest entity, such as a charitable gift annuity or charitable remainder trust.

Strategic Considerations for Managing RMDs

RMDs are a key part of retirement income planning, and the SECURE 2.0 Act provides new opportunities to manage distributions more effectively. With the changes brought by SECURE 2.0, retirees should reevaluate their RMD strategy to maximize tax efficiency and maintain financial stability. Some key considerations include:

Delaying RMDs for Tax Planning: If you don’t need RMD income, delaying withdrawals until age 73 (or 75 in 2033) allows your investments more time to grow tax-deferred.
Utilizing Roth Conversions: Since Roth IRAs are not subject to RMDs, converting traditional IRA assets into a Roth IRA before RMDs begin can help reduce future required withdrawals and their associated taxes.
Coordinating Withdrawals with Other Income Sources: Understanding how RMDs interact with Social Security, pension income, and other taxable income can help minimize the impact on tax brackets and Medicare premiums.
Considering Charitable Giving Strategies: Using QCDs can help retirees reduce their taxable income while supporting causes they care about.

At Treehouse Wealth, we can help you navigate RMD rules and implement a distribution strategy that aligns with your retirement goals and tax situation. If you have questions about how SECURE 2.0 affects your retirement plan, contact us, and we’ll help ensure you’re making the most of these new opportunities.

Sources:

1 Retirement plan and IRA required minimum distributions FAQs. Internal Revenue Service. https://www.irs.gov/retirement-plans/retirement-plan-and-ira-required-minimum-distributions-faqs

2 Retirement plan and IRA required minimum distributions FAQs. Internal Revenue Service. https://www.irs.gov/retirement-plans/retirement-plan-and-ira-required-minimum-distributions-faqs

3 Retirement plan and IRA required minimum distributions FAQs. Internal Revenue Service. https://www.irs.gov/retirement-plans/retirement-plan-and-ira-required-minimum-distributions-faqs

4 Taylor, K.R. (2024, June 2). Roth 401(k) Changes: What You Should Know for 2024. Kiplinger. https://www.kiplinger.com/taxes/roth-401k-changes-what-you-should-know#:~:text=Elimination%20of%20Roth%20401(k,holder%20reaches%20a%20certain%20age.)

5 (2023, November 26). Qualified charitable distributions allow eligible IRA owners up to $100,000 in tax-free gifts to charity. Internal Revenue Service. https://www.irs.gov/newsroom/qualified-charitable-distributions-allow-eligible-ira-owners-up-to-100000-in-tax-free-gifts-to-charity

Written By

Stacey Chin, CFP®, ChFC®

Private Wealth Advisor & CIO

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