New RMD Rules for Retirement Account Holders

Required Minimum Distributions, or RMDs, are amounts that owners of most retirement plans must withdraw annually. These rules exist so the government can collect tax revenue from tax-deferred accounts. Recent legislation, primarily the SECURE Act of 2019 and the SECURE 2.0 Act of 2022, has introduced updates affecting when distributions must start, the rules for inherited accounts, and the penalties for non-compliance.

New RMD Starting Age for Account Owners

One of the most direct changes from the SECURE 2.0 Act involves the age at which retirement account owners must begin taking RMDs. The law creates a tiered system based on birth year, delaying the start date for many individuals and allowing their investments more time to grow tax-deferred.

For those who turned 72 in 2022 or earlier, the old rules still apply, and they must continue taking distributions as scheduled. The SECURE 2.0 Act increased the RMD age to 73, effective January 1, 2023. If you were born between 1951 and 1959, your requirement to begin RMDs now starts at age 73. For example, an individual who turns 72 in 2023 is not required to take a distribution for that year; their first RMD is for 2024, the year they turn 73.

Beginning on January 1, 2033, the RMD starting age will increase again to 75. This later age applies to individuals born in 1960 or later. While your first RMD can be delayed until April 1 of the year after you reach the relevant starting age, all subsequent RMDs must be taken by December 31 of each year. Taking two distributions in the same year could have tax implications.

Distribution Rules for Inherited Retirement Accounts

The rules for beneficiaries who inherit retirement accounts have been transformed by the SECURE Act’s 10-year rule, which now governs how most non-spouse beneficiaries must handle inherited funds. This rule requires the entire balance of the inherited account to be withdrawn by the end of the tenth year following the original account owner’s death.

Eligible Designated Beneficiaries

A select group, known as Eligible Designated Beneficiaries (EDBs), retains more favorable distribution options and is not automatically subject to the 10-year rule. This category includes:

• The surviving spouse of the account owner
• The owner’s minor children
• Disabled or chronically ill individuals
• Any other individual not more than 10 years younger than the deceased owner

Surviving spouses have the most flexibility and can treat the inherited IRA as their own, rolling it over and delaying distributions until they reach their own RMD age. Starting in 2024, a surviving spouse can also elect to be treated as the deceased employee for RMD purposes, which can be advantageous if the deceased spouse was younger. Minor children of the original owner can take distributions based on their life expectancy until they reach age 21, at which point the 10-year rule applies to the remaining balance.

Other Designated Beneficiaries

Most non-spouse beneficiaries, such as adult children or grandchildren, are subject to the 10-year rule and must fully deplete the inherited account by December 31 of the tenth year after the owner’s death. This change accelerates the tax impact for beneficiaries who previously could have stretched distributions over their lifetimes.

A point of confusion has been whether annual RMDs are required during this 10-year window. If the original account owner died before their own required beginning date (RBD) for RMDs, the beneficiary is not required to take annual distributions. However, if the owner died on or after their RBD, the beneficiary must take annual RMDs in years one through nine. Due to widespread confusion, the IRS has provided penalty relief for missed annual payments for 2021 through 2024, with final regulations anticipated for 2025.

Calculating Your Required Minimum Distribution

To calculate your RMD, you need the fair market value of your retirement account as of December 31 of the preceding year and your age for the current distribution year. The calculation must be performed annually for each applicable retirement account.

The formula for your RMD is to divide the prior year-end account balance by a distribution period factor from the IRS. This factor represents an estimate of life expectancy and is found in the IRS’s Uniform Lifetime Table. This table applies to most account owners, including those who are unmarried or whose spouse is not more than 10 years younger.

For example, according to the current table, a 74-year-old has a distribution period of 25.5. To illustrate, consider a retiree of that age whose traditional IRA had a balance of $500,000 on December 31, 2023. Their RMD for 2024 would be calculated by dividing $500,000 by 25.5, which equals approximately $19,608. This is the minimum amount they must withdraw by December 31, 2024.

Key Roth and Penalty Rule Changes

The SECURE 2.0 Act introduced other modifications concerning Roth accounts and the penalties for non-compliance. A change that took effect in 2024 is the elimination of lifetime RMDs for Roth 401(k) accounts. Previously, only Roth IRAs were exempt from RMDs for the original owner, but this new provision aligns the rules for Roth accounts in employer-sponsored plans like 401(k)s and 403(b)s.

The legislation also reduced the penalty for failing to take an RMD. The excise tax for a missed RMD was lowered from 50% of the shortfall amount to 25%. Furthermore, the penalty can be reduced to 10% if the account holder corrects the mistake in a timely manner. This generally means withdrawing the missed amount and filing a corrected tax return within two years.