Understanding the Changes: Essential New RMD Rules to Familiarize Yourself with Prior to 2025
Saving pre-tax money for retirement through Traditional IRAs and 401(k) plans is a common practice for workers. Contributions lower the overall tax bill at the time, but taxes can't be avoided indefinitely.
Required minimum distributions (RMDs) are compulsory withdrawals that investors must make annually from traditional IRAs and other tax-deferred retirement accounts. The Secure 2.0 Act, which passed in 2022, adjusted some RMD regulations. Two crucial changes worth noting for investors before 2025 include:
RMDs start at age 73 for individuals born in 1951 or later
Traditionally, RMDs began at 70 1/2 for individuals born before July 1949, or 72 for those born between July 1949 and December 1950. The Secure 2.0 Act increased the starting age to 73 for individuals born in 1951 or later. This change applies to several types of retirement plans, such as:
- Regular IRAs
- SEP IRAs
- SIMPLE IRAs
- 401(k) plans
- 403(b) plans
- 457(b) plans
- Profit sharing plans
- Other defined contribution plans
In most cases, RMDs must be completed by Dec. 31 each year, but exceptions exist. For example, the first RMD can be delayed until April 1 of the following year. However, individuals deferring the first RMD must still take the second RMD by Dec. 31 of that same year.
2024 Update: Individuals born in 1951 or later must start withdrawing from tax-deferred retirement accounts annually from the year they turn 73. The first withdrawal can be delayed until April 1 of the following year. As a result, anyone turning 73 in 2024 must complete their first withdrawal by April 1, 2025. The second mandatory withdrawal, however, must still be completed by Dec. 31, 2025.
Roth 401(k) and Roth 403(b) plans no longer have RMD requirements
In the past, Roth accounts in 401(k) and 403(b) plans were subject to RMD rules. However, this rule changed in 2024 due to the Secure 2.0 Act. The IRS no longer requires account holders to make withdrawals during their lifetime. While this is true for Roth 401(k) and Roth 403(b) accounts, beneficiaries of Roth IRAs must still comply with RMD regulations.
Importantly, failing to withdraw the required amount before the deadline may result in an excise tax. This means the account holder forfeits a portion of the undrawn amount and is still required to withdraw the full amount. In 2023, the excise tax was 50%, but the Secure 2.0 Act lowered it to 25%. If the error is corrected within two years, the penalty can be further reduced to 10%. Anyone in this situation must file a Form 5329 with their federal tax return for the year the RMD was required but not taken.
2024 Update: Roth 401(k) and Roth 403(b) plans are exempt from RMD regulations while the original account holder is still alive. However, once the account holder passes away, the beneficiaries become responsible for RMD regulations. Furthermore, failing to complete an RMD within the allotted time no longer triggers a 50% excise tax. The penalty is now 25%, and it may be reduced to 10% if the error is corrected within two years.
After reaching the age of 73, individuals born in 1951 or later must start withdrawing a certain amount from their Traditional IRAs, SEP IRAs, SIMPLE IRAs, 401(k) plans, and other eligible retirement accounts annually, with the first withdrawal option available until April 1 of the following year. (Regarding RMDs)
Contrary to previous rules, Roth 401(k) and Roth 403(b) plans will no longer be subject to required minimum distributions while the original account holder is still alive, thanks to the Secure 2.0 Act passed in 2022. (Regarding Roth 401(k) and Roth 403(b) plans)
