Iowa fiduciary advisor

RMD Changes in 2023

In Iowa and across the nation, a new year brings new policies. As Congress passed a major boost to retirement savers via the SECURE Act 2.0, here’s what you need to know about major changes to RMD rules that kicked in Jan 1.

Retirement is a big part of the American Dream. You work hard in order to save money for your golden years to help ensure you can enjoy your post-work life.

The SECURE 2.0 Act of 2022 is changing the ways Americans save for retirement. These new rules were approved by President Biden, and they will be reforming RMDs (Required Minimum Distributions). For retirees or those approaching retirement who are worried about mandatory retirement account distributions, getting up to speed on the new RMD changes is very important.

Here’s what you need to know about those new rules and how they will affect your retirement plans.

RMD Penalties

It’s a tough penalty to swallow, and it’s also one of the heaviest penalties in the entire tax code. What are we talking about? Consequences of missing the RMD deadline.

Failing to take an RMD or missing an RMD usually resulted in getting hit with a 50% excise tax on the distribution shortfall. However, if you mistakenly missed the deadline, you can help avoid the additional penalty by claiming “reasonable error” and you should withdraw the necessary amount from your retirement quickly.

One example of reasonable error is falling sick due to a serious illness. Should this happen, you can ask for a penalty waiver form and send it to the IRS explaining why you didn’t take your RMD. From there, the IRS will be able to accept or reject your request.

2023 Changes: Since January 1st 2023, the SECURE 2.0 Act reduces the penalty to 25% in all cases. In addition, the penalty drops down to 10% if you take the necessary RMD by the end of the second year following the year it was due. So, for example, if you fail to take an RMD due in 2022, the penalty is knocked down to 10% if you withdraw the necessary funds by December 31, 2024. 

RMDs and Roth 401(k)

You’ve been working hard for years, and now it’s time to reap the rewards. But how do you know when to start taking distributions from your retirement accounts?

The good news is there are no required minimum distributions (RMDs) for Roth IRAs. However, RMDs are currently required for Roth 401(k) accounts. You can get around the Roth 401(k) RMD rules by rolling over the money into a Roth IRA. But watch out for the Roth IRA five-year rule – if you’re not careful, you may have to wait five years to pull your money out of the Roth IRA.

2023 Changes: The SECURE 2.0 Act does away with the need to roll over funds from a Roth 401(k) to a Roth IRA. Instead, as with Roth IRAs, Roth 401(k) accounts won’t be subject to the RMD rules before the account holder dies (post-death minimum distribution rules still apply). This change generally kicks in starting in 2024; however, an exception applies to RMDs required before 2024 but not required to be paid until January 1, 2024 or later.

Annuities and RMDs

Annuities are helpful to many, but they have their problems. For instance, if you happen to have an annuity in your retirement account, you may be very unhappy with the way things are currently set up.

Under prior law, when a retirement account included an annuity, the account was split into two parts: one for distributions from the annuity, and one for distributions from everything else. This could result in higher RMDs than necessary.

2023 Changes: The SECURE 2.0 Act allows the following payments if these requirements are met:

  • Annuity payments that increase annually up to 5% per year
  • Lump sum payments that result in a shortening of the payment period with respect to an annuity or a full or partial commutation of the future annuity payments
  • Lump sum payments that accelerate the receipt of annuity payments that are scheduled to be received within the next 12 months
  • Payments “in the nature of a dividend” or similar distribution
  • Final payments upon death that don’t exceed the total amount of consideration paid for the annuity payments, minus the aggregate amount of prior distributions or payments from or under the contract.

RMDs for Surviving Spouses

Before a surviving spouse makes a rollover of a deceased spouse’s qualified retirement account or individual retirement account, the special rule that applies to surviving spouses regarding when required minimum distributions (RMDs) must commence must be considered.

2023 Changes: The SECURE 2.0 Act has made it possible for a surviving spouse to delay taking RMDs from an inherited retirement account. The current rules allow a surviving spouse to be treated as the deceased account owner for RMD purposes starting in 2024. If the surviving spouse is younger than the deceased spouse, this can delay taking RMDs from their inherited account until they reach age 70½.

The surviving spouse must elect this treatment according to procedures that will be set by the IRS, and this election will be irrevocable. Lastly, the surviving spouse must notify their account administrator.

Final Thoughts

At Johnson Wealth and Income Management, we make it our mission to help ensure you’re up to date with retirement rule changes. Our advisors are committed to breaking down the common misconceptions about retirement planning by educating our clients and communities through workshops on topics related to more conservative investment alternatives. 

We also offer a wealth of services, custom-designed to help you get the most from your retirement. If you’re looking to help boost your retirement savings for 2023 and beyond, contact us here today.



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