What Are the New SECURE Act RMD Rules?

A Required Minimum Distribution, or RMD, is the amount of money that must be withdrawn from most retirement accounts annually. These rules exist to ensure that individuals spend their retirement savings during their lifetime and not use them for estate planning purposes. The legal landscape governing these withdrawals was altered by the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 and the SECURE 2.0 Act of 2022. These laws changed when RMDs must begin and how quickly inherited accounts must be distributed, creating new guidelines for account owners and beneficiaries to navigate.

RMD Starting Age for Account Owners

Recent legislation changed the age at which retirement account owners must begin taking their RMDs. For many years, the required beginning date was April 1 of the year after an individual turned 70½. The SECURE Act of 2019 increased the starting age to 72 for individuals who reached age 70½ after 2019. The SECURE 2.0 Act of 2022 further adjusted the timeline, and as of January 1, 2023, the age to start RMDs increased from 72 to 73. The law also includes a future increase; beginning on January 1, 2033, the age threshold will rise again to 75.

If you were born between 1951 and 1959, your RMD starting age is 73. For those born in 1960 or later, the starting age will be 75. Individuals born in 1950 or earlier were subject to the previous rules of age 70½ or 72. These rules apply to traditional IRAs, SEP IRAs, SIMPLE IRAs, and various employer-sponsored plans like 401(k)s and 403(b)s.

A long-standing exception continues to apply for individuals with funds in an employer-sponsored plan, such as a 401(k). If you are still working for the company that sponsors the plan, are not a 5% owner of the business, and the plan allows it, you can delay your RMDs from that specific plan until you retire. This “still-working” exception does not apply to traditional IRAs, from which you must take RMDs regardless of your employment status.

The 10-Year Rule for Inherited Accounts

The SECURE Act fundamentally changed the rules for most individuals who inherit a retirement account, replacing the popular “stretch” provision with a 10-year rule. Previously, many non-spouse beneficiaries could take distributions over their own life expectancy. The new rule requires a “designated beneficiary” to withdraw the entire balance of an account inherited on or after January 1, 2020, by December 31 of the tenth year following the year of the original account owner’s death.

Initially, many interpreted this to mean a beneficiary could wait until the final year to take the full distribution. However, the IRS issued proposed regulations that specified if the original account owner had already started taking their own RMDs, the beneficiary must not only empty the account within 10 years but also take annual distributions during that period. These annual payments would be based on the beneficiary’s life expectancy.

This created significant confusion, as many beneficiaries who inherited in 2020 or later had not taken annual withdrawals. In response, the IRS has issued a series of notices providing penalty relief for missed annual RMDs for the years 2021 through 2024. Final regulations confirmed the requirement for these annual RMDs, which will effectively start in 2025 for those affected.

Exceptions for Eligible Designated Beneficiaries

While the 10-year rule is the new standard for many, the SECURE Act created a special category of beneficiaries who are exempt from it. These individuals are known as “Eligible Designated Beneficiaries” (EDBs) and can still take distributions over their life expectancy, similar to the old “stretch” rules. There are five specific categories of EDBs.

Surviving Spouses

A surviving spouse who is the sole beneficiary of a retirement account has the most flexibility. They can treat the inherited IRA as their own by rolling it over into their personal IRA. This allows the spouse to delay taking any RMDs until they reach their own required beginning date. SECURE 2.0 also allows a surviving spouse to elect to be treated as the deceased employee for RMD purposes, which can sometimes allow for a longer delay before distributions must begin.

Minor Children of the Account Owner

A biological or legally adopted minor child of the original account owner is considered an EDB. This allows the child to take distributions based on their own life expectancy until they reach the age of majority (21 under proposed rules). After that point, the 10-year rule begins, and the remaining account balance must be fully distributed within ten years.

Disabled Individuals

A beneficiary who is considered disabled under the strict definition provided by the IRS can take distributions over their life expectancy. To qualify, the individual must be unable to engage in any substantial gainful activity due to a medically determinable physical or mental impairment that is expected to be long-continuing, indefinite, or result in death. This status must be certified and documented to the plan administrator.

Chronically Ill Individuals

Similar to disabled individuals, a chronically ill beneficiary can also stretch distributions over their lifetime. A person is defined as chronically ill if they have been certified by a licensed health care practitioner as being unable to perform at least two activities of daily living for a prolonged period. These activities include eating, bathing, dressing, and toileting. The certification must be provided to the financial institution.

Beneficiaries Not More Than 10 Years Younger

The final category of EDBs includes any individual who is not more than 10 years younger than the deceased account owner. This often applies to siblings or unmarried partners who are close in age. These beneficiaries can take required minimum distributions based on their own single life expectancy, providing a significant advantage compared to the 10-year rule.

Penalties for Missed RMDs

Failing to take a required minimum distribution on time, or taking less than the required amount, results in a tax penalty. For many years, this penalty was a 50% excise tax on the amount that should have been withdrawn but was not. The SECURE 2.0 Act provided relief by substantially reducing this penalty.

Effective for 2023 and later years, the excise tax for a missed RMD has been lowered from 50% to 25%. The legislation introduced a further incentive for prompt correction. If an individual corrects the failure to take an RMD within a “correction window,” the penalty is reduced further to 10%. This window generally closes at the end of the second year after the year the RMD was missed.

The penalty is calculated and paid using IRS Form 5329, “Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts.” It is also possible to request a waiver of the penalty altogether by filing this form and attaching a letter of explanation. The IRS may waive the penalty if the account owner can demonstrate that the shortfall in distributions was due to reasonable error.