The Internal Revenue Service (IRS) is drawing attention to the upcoming deadlines for required minimum distributions (RMDs) from individual retirement arrangements (IRAs) and other retirement plans for individuals born before 1951. The agency also noted important changes to the law that will take effect in 2023, impacting the age at which account owners must begin taking RMDs.
RMDs are the sums that owners of many retirement plans and IRA accounts must withdraw annually. These withdrawals are considered taxable income and may be penalized if not taken in a timely manner. For those born before 1951, RMDs from IRAs and retirement plans should have already started and will continue to be mandatory in 2023.
However, the Secure 2.0 Act has introduced changes slated for 2023. The legislation increases the age at which account owners must start taking RMDs from 72 to 73. Consequently, individuals born in 1951 will now need to receive their first required minimum distribution by April 1, 2025.
The RMD rules apply to various IRAs, including SIMPLE IRAs and SEP IRAs. Once individuals reach the age of 72 – or 73 if they reach 72 in 2023 or later – they must start withdrawing from their IRAs each year, regardless of their employment status. Roth IRA owners, however, are not obliged to take withdrawals during their lifetime. Nevertheless, after the death of the Roth IRA account owner, beneficiaries are subject to RMD rules.
These RMD rules also extend to employer-sponsored retirement plans such as profit-sharing plans, 401(k) plans, 403(b) plans, and 457(b) plans. Participants in these plans can delay their RMDs until retirement unless they own 5% or more of the business sponsoring the plan.
The changes will also affect designated Roth accounts in a 401(k) or 403(b) plan. While these accounts will be subject to RMD rules in 2023, they will not be subject to the rules while the account owner is alive, beginning in 2024.
The IRS has provided a comparison chart detailing the basic RMD rules that apply to IRAs and defined contribution plans to help taxpayers navigate these requirements. As we approach the new year, it’s essential for those impacted to familiarize themselves with these changes and ensure they meet their obligations to avoid potential penalties.
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