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Understanding Recent Changes to Required Minimum Distributions (RMDs) Thumbnail

Understanding Recent Changes to Required Minimum Distributions (RMDs)

As a financial planning firm, we believe it is important that we stay informed about updates and changes to the rules surrounding retirement accounts. Recent changes impact when you must start taking distributions from retirement accounts and the rules for inherited IRAs. Here is an overview to help you better understand how this may effect you. 

 New Starting Age for RMDs

 The SECURE Act of 2019 and SECURE Act 2.0 of 2022 introduced significant changes to RMD starting ages. Previously, the starting age was 70½. The updated age bands are:

 

 

These changes may provide more flexibility in managing both your retirement savings and tax liabilities by delaying distributions.

 Understanding the Required Beginning Date

 The required beginning date (RBD) is the deadline by which you must start taking RMDs from your retirement accounts. The RBD is typically April 1 of the year following the year you reach the required starting age (70½, 72, or 73, depending on your birth year). For example, if you turn 73 in 2024, you would need to take your first RMD by April 1, 2025.  However, since an RMD must be taken every year once you reach mandatory RMD age, if you choose to take your initial RMD in the calendar year following reaching that age, you would be required to take two RMD withdrawals that year.

 RMD Rules for Inherited Traditional IRAs

 A significant change made by the Secure Act was to the rules for inherited traditional IRAs. The changes depend on when the original account owner passed away and the relationship of the beneficiary to the deceased.

 Spousal Beneficiaries:

  • You can treat the inherited IRA as your own or remain the beneficiary.
  • If you remain the beneficiary, RMDs will be based on your age using the IRS Single Life Expectancy Table.

 Non-Spousal Beneficiaries:

  • If the account owner passed away before 2020, you can use the life expectancy method to take distributions over your lifetime.
  • For deaths after 2019, the "10-Year Rule" applies. This means you must distribute the entire balance by December 31 of the tenth year following the original account owner's death.

 Original Owner Passed Before Their Required Beginning Date:

  • The 10-Year Rule applies, but no annual RMDs are required within those ten years. However, the entire balance must be distributed by the end of the tenth year.

 Original Owner Passed After Their Required Beginning Date:

  • RMDs must continue annually based on the longer of the beneficiary's life expectancy or the original owner's life expectancy, with the balance distributed by the end of the tenth year either way.

 RMD Rules for Roth IRAs

 Roth IRAs have different rules than Traditional IRAs, particularly regarding RMD requirements and how beneficiaries must handle distributions.

 Original Account Owner:

  • Roth IRA owners are not required to take RMDs during their lifetime.

 Spousal Beneficiaries:

  • You can treat the inherited Roth IRA as your own or remain the beneficiary.
  • Whether you treat the inherited Roth IRA as your own or remain the beneficiary, you are not required to take RMDs during your lifetime.

 Non-Spousal Beneficiaries:

  • The 10-Year Rule applies if the original owner passed after 2019. You must distribute the entire balance by December 31 of the tenth year following the original account owner's death.
  • If the original owner passed prior to 2020, you may use the life expectancy method to take distributions. 
  • Distributions are generally tax-free if the Roth IRA has been open for at least five years.

 Summary

 The changes enacted as part of the SECURE ACT impact the timing, amount and duration of distributions from qualified retirement accounts. They affect both account owners and beneficiaries. Understanding these changes can help ensure compliance with the rules and optimize retirement savings.

 At AP Denver, we work with our clients to create a financial plan to help them achieve their financial goals. If you, or someone you know, have questions about how these changes to retirement savings rules will impact financial planning please reach out to us to discuss your specific situation.