Secure Act 2.0: RMD Start Age Pushed Back to 73 Starting in 2023
On December 23, 2022, Congress passed the Secure Act 2.0, which moved the required minimum distribution (RMD) age from the current age of 72 out to age 73 starting in 2023. They also went one step further and included in the new law bill an automatic increase in the RMD beginning in 2033, extending the RMD start age to 75.
On December 23, 2022, Congress passed the Secure Act 2.0, which moved the required minimum distribution (RMD) age from the current age of 72 out to age 73 starting in 2023. They also went one step further and included in the new law bill an automatic increase in the RMD beginning in 2033, extending the RMD start age to 75.
This is the second time within the past 3 years that Congress has changed the start date for required minimum distributions from IRAs and employer-sponsored retirement plans. Here is the history and the future timeline of the RMD start dates:
1986 – 2019: Age 70½
2020 – 2022: Age 72
2023 – 2032: Age 73
2033+: Age 75
You can also determine your RMD start age based on your birth year:
1950 or Earlier: RMD starts at age 72
1951 – 1959: RMD starts at age 73
1960 or later: RMD starts at age 75
What Is An RMD?
An RMD is a required minimum distribution. Once you hit a certain age, the IRS requires you to start taking a distribution each year from your various retirement accounts (IRA, 401(K), 403(b), Simple IRA, etc.) because they want you to begin paying tax on a portion of your tax-deferred assets whether you need them or not.
What If You Turned Age 72 In 2022?
If you turned age 72 anytime in 2022, the new Secure Act 2.0 does not change the fact that you would have been required to take an RMD for 2022. This is true even if you decided to delay your first RMD until April 1, 2023, for the 2022 tax year.
If you are turning 72 in 2023, under the old rules, you would have been required to take an RMD for 2023; under the new rules, you will not have to take your first RMD until 2024, when you turn age 73.
Planning Opportunities
By pushing the RMD start date from age 72 out to 73, and eventually to 75 in 2033, it creates more tax planning opportunities for individuals that do need to take distributions out of their IRAs to supplement this income. Since these distributions from your retirement account represent taxable income, by delaying that mandatory income could allow individuals the opportunity to process larger Roth conversions during the retirement years, which can be an excellent tax and wealth-building strategy.
Delaying your RMD can also provide you with the following benefits:
Reduce the amount of your Medicare premiums
Reduce the percentage of your social security benefit that is taxed
Make you eligible for tax credits or deductions that you would have phased out of
Potentially allow you to realize a 0% tax rate on long-term capital gains
Continue to keep your pre-tax retirement dollars invested and growing
Additional Secure Act 2.0 Articles
About Michael……...
Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.
IRA RMD Start Date Changed From Age 70 ½ to Age 72 Starting In 2020
The SECURE Act was passed into law on December 19, 2019 and with it came some big changes to the required minimum distribution (“RMD”) requirements from IRA’s and retirement plans. Prior to December 31, 2019, individuals
The SECURE Act was passed into law on December 19, 2019 and with it came some big changes to the required minimum distribution (“RMD”) requirements from IRA’s and retirement plans. Prior to December 31, 2019, individuals were required to begin taking mandatory distributions from their IRA’s, 401(k), 403(b), and other pre-tax retirement accounts starting in the year that they turned age 70 ½. The SECURE Act delayed the start date of the RMD’s to age 72. But like most new laws, it’s not just a simple and straightforward change. In this article we will review:
Old Rules vs New Rules surrounding RMD’s
New rules surrounding Qualified Charitable Distributions from IRA’s
Who is still subject to the 70 ½ RMD requirement?
The April 1st delay rule
Required Minimum Distributions
A quick background on required minimum distributions, also referred to as RMD’s. Prior to the SECURE Act, when you turned age 70 ½ the IRS required you to take small distributions from your pre-tax IRA’s and retirement accounts each year. For individuals that did not need the money, they did not have a choice. They were forced to withdraw the money out of their retirement accounts and pay tax on the distributions. Under the current life expectancy tables, in the year that you turned age 70 ½ you were required to take a distribution equaling 3.6% of the account balance as of the previous year end.
With the passing of the SECURE Act, the start age from these RMD’s is now delayed until the calendar year that an individual turns age 72.
OLD RULE: Age 70 ½ RMD Begin Date
NEW RULE: Age 72 RMD Begin Date
Still Subject To The Old 70 ½ Rule
If you turned age 70 ½ prior to December 31, 2019, you will still be required to take RMD’s from your retirement accounts under the old 70 ½ RMD rule. You are not able to delay the RMD’s until age 72.
Example: Sarah was born May 15, 1949. She turned 70 on May 15, 2019 making her age 70 ½ on November 15, 2019. Even though she technically could have delayed her first RMD to April 1, 2020, she will not be able to avoid taking the RMD’s for 2019 and 2020 even though she will be under that age of 72 during those tax years.
Here is a quick date of birth reference to determine if you will be subject to the old 70 ½ start date or the new age 72 start date:
Date of Birth Prior to July 1, 1949: Subject to Age 70 ½ start date for RMD
Date of Birth On or After July 1, 1949: Subject to Age 72 start date for RMD
April 1 Exception Retained
OLD RULE: In the the year that an individual turned age 70 ½, they had the option to delay their first RMD until April 1st of the following year. This is a tax strategy that individuals engaged in to push that additional taxable income associated with the RMD into the next tax year. However, in year 2, the individual was then required to take two RMD’s in that calendar year: One prior to April 1st for the previous tax year and the second prior to December 31st for the current tax year.
NEW RULE: Unchanged. The April 1st exception for the first RMD year was retained by the SECURE Act as well as the requirement that if the RMD was voluntarily delayed until the following year that two RMD’s would need be taken in the second year.
Qualified Charitable Distributions (QCD)
OLD RULES: Individuals that had reached the RMD age of 70 ½ had the option to distribute all or a portion of their RMD directly to a charitable organization to avoid having to pay tax on the distribution. This option was reserved only for individuals that had reached age 70 ½. In conjunction with tax reform that took place a few years ago, this has become a very popular option for individuals that make charitable contributions because most individual taxpayers are no longer able to deduct their charitable contributions under the new tax laws.
NEW RULES: With the delay of the RMD start date to age 72, do individuals now have to wait until age 72 to be eligible to make qualified charitable distributions? The answer is thankfully no. Even though the RMD start date is delayed until age 72, individuals will still be able to make tax free charitable distributions from their IRA’s in the calendar year that they turn age 70 ½. The limit on QCDs is still $100,000 for each calendar year.
NOTE: If you plan to process a qualified charitable distributions from your IRA after age 70 ½, you have to be well aware of the procedures for completing those special distributions otherwise it could cause those distributions to be taxable to the owner of the IRA. See the article below for more on this topic:
ANOTHER NEW RULE: There is a second new rule associated with the SECURE Act that will impact this Qualified Charitable Distribution strategy. Under the old tax law, individuals were unable to contribute to Traditional IRA’s past the age of 70 ½. The SECURE Act eliminated that rule so individuals that have earned income past age 70 ½ will be eligible to make contributions to Traditional IRAs and take a tax deduction for those contributions.
As an anti-abuse provision, any contributions made to a Traditional IRA past the age of 70 ½ will, in aggregate, dollar for dollar, reduce the amount of your qualified charitable distribution that is tax free.
Example: A 75 year old retiree was working part-time making $20,000 per year for the past 3 years. To reduce her tax bill, she contributed $7,000 per year to a traditional IRA which is allowed under the new tax laws. This year she is required to take a $30,000 required minimum distribution (RMD) from her retirement accounts and she wants to direct that all to charity to avoid having to pay tax on the $30,000. Because she contributed $21,000 to a traditional IRA past the age of 70 ½, $21,000 of the qualified charitable distribution would be taxable income to her, while the remaining $9,000 would be a tax free distribution to the charity.
$30,000 QCD – $21,000 IRA Contribution After Age 70 ½ = $9,000 tax free QCD
About Michael……...
Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.
New Rules For Non Spouse Beneficiaries Of Retirement Accounts Starting In 2020
The SECURE Act was signed into law on December 19, 2019 and with it comes some very important changes to the options that are available to non-spouse beneficiaries of IRA’s, 401(k), 403(b), and other types of retirement accounts
The SECURE Act was signed into law on December 19, 2019 and with it comes some very important changes to the options that are available to non-spouse beneficiaries of IRA’s, 401(k), 403(b), and other types of retirement accounts starting in 2020. Unfortunately, with the passing of this law, Congress took away one of the most valuable distribution options available to non-spouse beneficiaries called the “stretch” provision. Non-spouse beneficiaries would utilize this distribution option to avoid the tax hit associated with having to take big distributions from pre-tax retirement accounts in a single tax year. This article will cover:
The old inherited IRA rules vs. the new inherited IRA rules
The new “10 Year Rule”
Who is grandfathered in under the old inherited IRA rules?
Impact of the new rules on minor children beneficiaries
Tax traps awaiting non spouse beneficiaries of retirement accounts
The “Stretch” Option Is Gone
The SECURE Act’s elimination of the stretch provision will have a big impact on non-spouse beneficiaries. Prior to January 1, 2020, non-spouse beneficiaries that inherited retirement accounts had the option to either:
Take a full distribution of the retirement account within 5 years
Rollover the balance to an inherited IRA and stretch the distributions from the retirement account over their lifetime. Also known as the “stretch option”.
Since any money distributed from a pre-tax retirement account is taxable income to the beneficiary, many non-spouse beneficiaries would choose the stretch option to avoid the big tax hit associated with taking larger distributions from a retirement account in a single year. Under the old rules, if you did not move the money to an inherited IRA by December 31st of the year following the decedent’s death, you were forced to take out the full account balance within a 5 year period.
On the flip side, the stretch option allowed these beneficiaries to move the retirement account balance from the decedent’s retirement account into their own inherited IRA tax and penalty free. The non-spouse beneficiary was then only required to take small distributions each year from the account called a RMD (“required minimum distribution”) but was allowed to keep the retirement account intact and continuing to accumulate tax deferred over their lifetime. A huge benefit!
The New 10 Year Rule
For non-spouse beneficiaries, the stretch option was replaced with the “10 Year Rule” which states that the balance in the inherited retirement account needs to be fully distributed by the end of the 10th year following the decedent’s date of death. The loss of the stretch option will be problematic for non-spouse beneficiaries that inherit sizable retirement accounts because they will be forced to take larger distributions exposing those pre-tax distributions to higher tax rates.
No RMD Requirement Under The 10 Year Rule
Even though the stretch option has been lost, beneficiaries will have some flexibility as to the timing of when distributions will take place from their inherited IRA. Unlike the stretch provision that required the non-spouse beneficiary to start taking the RMD’s the year following the decedent’s date of death, there are no RMD requirements associated with the new 10 year rule. Meaning in extreme cases, the beneficiary could choose not to take any distributions from the retirement account for 9 years and then in year 10 distribute the full account balance.
Now, unless you love paying taxes, very few people would elect to distribute a large pre-tax retirement account balance in a single tax year but the new rules give you a decade to coordinate a distribution strategy that will help you to manage your tax liability under the new rules.
Tax Traps For Non-Spouse Beneficiaries
These new inherited IRA distribution rules are going to require pro-active tax and financial planning for the beneficiaries of these retirement accounts. I’m lumping financial planning into that mix because taking distributions from pre-tax retirement accounts increases your taxable income which could cause the following things to happen:
Reduce the amount of college financial aid that your child is receiving
Increase the amount of your social security that is considered taxable income
Loss of property tax credits such as the Enhanced STAR Program
Increase your Medicare Part B and Part D premiums the following year
You may phase out of certain tax credits or deductions that you were previously receiving
Eliminate your ability to contribute to a Roth IRA
Loss of Medicaid or Special Needs benefits
Ordinary income and capital gains taxed at a higher rate
You really have to plan out the next 10 years and determine from a tax and financial planning standpoint what is the most advantageous way to distribute the full balance of the inherited IRA to minimize the tax hit and avoid triggering an unexpected financial consequence associated with having additional income during that 10 year period.
Who Is Grandfathered In?
If you are the non-spouse beneficiary of a retirement account and the decedent passed away prior to January 1, 2020, you are grandfathered in under the old inherited IRA rules. Meaning you are still able to utilize the stretch provision. Here are a few examples:
Example 1: If you had a parent pass away in 2018 and in 2019 you rolled over their IRA into your own inherited IRA, you are not subject to the new 10 year rule. You are allowed to stretch the IRA distributions over your lifetime in the form of those RMD’s.
Example 2: On December 15, 2019, you father passed away and you are listed as the beneficiary on his 401(k) account. Since he passed away prior to January 1, 2020, you would still have the option of setting up an Inherited IRA prior to December 31, 2020 and then stretching the distributions over your lifetime.
Example 3: On February 3, 2020, your uncle passes away and you are listed as a beneficiary on his Rollover IRA. Since he passed away after January 1, 2020, you would be required to distribute the full IRA balance prior to December 31, 2030.
You are also grandfathered in under the old rules if:
The beneficiary is the spouse
Disabled beneficiaries
Chronically Ill beneficiaries
Individuals who are NOT more than 10 years younger than the decendent
Certain minor children (see below)
Even beyond 2020, the beneficiaries listed above will still have the option to rollover the balance into their own inherited IRA and then stretch the required minimum distributions over their lifetime.
Minor Children As Beneficiaries
The rules are slightly different if the beneficiary is the child of the decedent AND they are still a minor. I purposely capitalized the word “and”. Within the new law is a “Special Rule for Minor Children” section that states if the beneficiary is a child of the decedent but has not reached the age of majority, then the child will be able to take age-based RMD’s from the inherited IRA but only until they reach the age of majority. Once they are no longer a minor, they are required to distribute the remainder of the retirement account balance within 10 years.
Example: A mother and father pass away in a car accident and the beneficiaries listed on their retirement accounts are their two children, Jacob age 10, and Sarah age 8. Jacob and Sarah would be able to move the balances from their parent’s retirements accounts into an inherited IRA and then just take small required minimum distributions from the account based on their life expectancy until they reach age 18. In their state of New York, age 18 is the age of majority. The entire inherited IRA would then need to be fully distributed to them before the end of the calendar year of their 28th birthday.
This exception only applies if they are a child of the decedent. If a minor child inherits a retirement account from a non-parent, such as a grandparent, then they are immediately subject to the 10 year rule.
Note: the age of majority varies by state.
Plans Not Impacted Until January 1, 2022
The replacement of the stretch option with the new 10 Year Rule will impact most non-spouse beneficiaries in 2020. There are a few exceptions to that effective date:
403(b) & 457 plans sponsored by state and local governments, including Thrift Savings Plans sponsored by the Federal Government will not lose the stretch option until January 1, 2022
Plans maintained pursuant to a collective bargaining agreement also do not lose the stretch option until January 1, 2022
Advanced Planning
Under the old inherited IRA rules there was less urgency for immediate tax planning because the non-spouse beneficiaries just had to move the money into an inherited IRA the year after the decedent passed away and in most cases the RMD's were relatively small resulting in a minimal tax impact. For non-spouse beneficiaries that inherit a retirement account after January 1, 2020, it will be so important to have a tax plan and financial plan in place as soon as possible otherwise you could lose a lot of your inheritance to higher taxes or other negative consequences associated with having more income during those distribution years.
Please feel free to contact us if you have any questions on the new inherited IRA rules. We would also be more than happy to share with you some of the advanced tax strategies that we will be using with our clients to help them to minimize the tax impact of the new 10 year rule.
About Michael……...
Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.
Spouse Inherited IRA Options
If your spouse passes away and they had either an IRA, 401(k), 403(b), or some other type of employer sponsored retirement account, you will have to determine which distribution option is the right one for you. There are deadlines that you will need to be aware of, different tax implications based on the option that you choose, forms that need to be
If your spouse passes away and they had either an IRA, 401(k), 403(b), or some other type of employer sponsored retirement account, you will have to determine which distribution option is the right one for you. There are deadlines that you will need to be aware of, different tax implications based on the option that you choose, forms that need to be completed, and accounts that may need to be established.
Spouse Distribution Options
As the spouse, if you are listed as primary beneficiary on a retirement account or IRA, you have more options available to you than a non-spouse beneficiary. Non-spouse beneficiaries that inherited retirement accounts after December 31, 2019 are required to fully distribution the account 10 years following the year that the decedent passed away. But as the spouse of the decedent, you have the following options:
Fulling distribute the retirement account with 10 years
Rollover the balance to an inherited IRA
Rollover the balance to your own IRA
To determine which option is the right choice, you will need to take the following factors into consideration:
Your age
The age of your spouse
Will you need to take money from the IRA to supplement your income?
Taxes
Cash Distributions
We will start with the most basic option which is to take a cash distribution directly from your spouse’s retirement account. Be very careful with this option. When you take a cash distribution from a pre-tax retirement account, you will have to pay income tax on the amount that is distributed to you. For example, if your spouse had $50,000 in a 401(k), and you decide to take the full amount out in the form of a lump sum distribution, the full $50,000 will be counted as taxable income to you in the year that the distribution takes place. It’s like receiving a paycheck from your employer for $50,000 with no taxes taken out. When you go to file your taxes the following year, a big tax bill will probably be waiting for you.
In most cases, if you need some or all of the cash from a 401(k) account or an IRA, it usually makes more sense to first rollover the entire balance into an inherited IRA, and then take the cash that you need from there. This strategy gives you more control over the timing of the distributions which may help you to save some money in taxes. If as the spouse, you need the $50,000, but you really need $30,000 now and $20,000 in 6 months, you can rollover the full $50,000 balance to the inherited IRA, take $30,000 from the IRA this year, and take the additional $20,000 on January 2nd the following year so it spreads the tax liability between two tax years.
10% Early Withdrawal Penalty
Typically, if you are under the age of 59½, and you take a distribution from a retirement account, you incur not only taxes but also a 10% early withdrawal penalty on the amount this is distributed from the account. This is not the case when you take a cash distribution, as a beneficiary, directly from the decedents retirement account. You have to report the distribution as taxable income but you do not incur the 10% early withdrawal penalty, regardless of your age.
IRA Options
Let's move onto the two IRA options that are available to spouse beneficiaries. The spouse has the decide whether to:
Rollover the balance into their own IRA
Rollover the balance into an inherited IRA
By processing a direct rollover to an IRA in either case, the beneficiary is able to avoid immediate taxation on the balance in the account. However, it’s very important to understand the difference between these two options because all too often this is where the surviving spouse makes the wrong decision. In most cases, once this decision is made, it cannot be reversed.
Spouse IRA vs Inherited IRA
There are some big differences comparing the spouse IRA and inherited IRA option.
There is common misunderstanding of the RMD rules when it comes to inherited IRA’s. The spouse often assumes that if they select the inherited IRA option, they will be forced to take a required minimum distribution from the account just like non-spouse beneficiaries had to under the old inherited IRA rules prior to the passing of the SECURE Act in 2019. That is not necessarily true. When the spouses establishes an inherited IRA, a RMD is only required when the deceases spouse would have reached age 70½. This determination is based on the age that your spouse would have been if they were still alive. If they are under that “would be” age, the surviving spouse is not required to take an RMD from the inherited IRA for that tax year.
For example, if you are 39 and your spouse passed away last year at the age of 41, if you establish an inherited IRA, you would not be required to take an RMD from your inherited IRA for 29 years which is when your spouse would have turned age 70½. In the next section, I will explain why this matters.
Surviving Spouse Under The Age of 59½
As the surviving spouse, if you are under that age of 59½, the decision between either establishing an inherited IRA or rolling over the balance into your own IRA is extremely important. Here’s why .
If you rollover the balance to your own IRA and you need to take a distribution from that account prior to reaching age 59½, you will incur both taxes and the 10% early withdrawal penalty on the amount of the distribution.
But wait…….I thought you said the 10% early withdrawal penalty does not apply?
The 10% early withdrawal penalty does not apply for distributions from an “inherited IRA” or for distributions to a beneficiary directly from the decedents retirement account. However, since you moved the balance into your own IRA, you have essentially forfeited the ability to avoid the 10% early withdrawal penalty for distributions taken before age 59½.
The Switch Strategy
There is also a little know “switch strategy” for the surviving spouse. Even if you initially elect to rollover the balance to an inherited IRA to maintain the ability to take penalty free withdrawals prior to age 59½, at any time, you can elect to rollover that inherited IRA balance into your own IRA.
Why would you do this? If there is a big age gap between you and your spouse, you may decide to transition your inherited IRA to your own IRA prior to age 59½. Example, let’s assume the age gap between you and your spouse was 15 years. In the year that you turn age 55, your spouse would have turned age 70½. If the balance remains in the inherited IRA, as the spouse, you would have to take an RMD for that tax year. If you do not need the additional income, you can choose to rollover the balance from your inherited IRA to your own IRA and you will avoid the RMD requirement. However, in doing so, you also lose the ability to take withdrawals from the IRA without the 10% early withdrawal penalty between ages 55 to 59½. Based on your financial situation, you will have to determine whether or not the “switch strategy” makes sense for you.
The Spousal IRA
So when does it make sense to rollover your spouse’s IRA or retirement account into your own IRA? There are two scenarios where this may be the right solution:
The surviving spouse is already age 59½ or older
The surviving spouse is under the age of 59½ but they know with 100% certainty that they will not have to access the IRA assets prior to reaching age 59½
If the surviving spouse is already 59½ or older, they do not have to worry about the 10% early withdrawal penalty.
For the second scenarios, even though this may be a valid reason, it begs the question: “If you are under the age of 59½ and you have the option of changing the inherited IRA to your own IRA at any time, why take the risk?”
As the spouse you can switch from inherited IRA to your own IRA but you are not allowed to switch from your own IRA to an inherited IRA down the road.
About Michael……...
Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.
