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January 16, 2024

Navigating RMDs and recent changes

Frank Bitzer

Watch the video for more on this topic.

Recent changes introduced by the SECURE 2.0 Act made understanding Required Minimum Distributions (RMDs) in retirement planning more critical. As we commemorate the one-year anniversary of these changes, it's essential to comprehend the nuances of RMDs, exceptions, and the broader implications on retirement plans.

RMDs represent the minimum amounts that retirement plan account owners must withdraw annually. A notable exception arises when a participant is still actively employed with their plan sponsor, allowing them to waive taking their RMD. However, if the account is an IRA or the account owner holds a 5% or more ownership in the sponsoring business, RMDs must commence regardless of employment status.

Participants and IRA owners bear the responsibility of withdrawing the correct amount of RMDs on time each year. Failure to do so can lead to a 25% excise tax penalty, reduced to 10% under certain circumstances. Roth 401(k) accounts gained exemption from RMD rules starting in 2024, and Roth IRAs are not subject to RMDs while the owner is alive.

A critical aspect is the timing of RMDs. Participants must take their RMD for the year they reach their RMD age, with the option to delay the first RMD until April 1 of the following year. Subsequent years necessitate an annual RMD by December 31. Born before July 1, 1940, participants are required to begin their RMDs at age 70-1/2.

SECURE 1.0 Act and SECURE 2.0 Act changed RMD ages for those born between July 1, 1940, and January 1, 1960. Participants born on or after January 1, 1960, now see their RMD age raised to 75 under SECURE 2.0 Act.

Plan documents are crucial in determining the distribution method in one lump sum or installments throughout the year. Additionally, if a participant has multiple plans, RMDs must be taken separately from each plan.

Interestingly, RMDs cannot roll over into another retirement plan or an IRA. The calculation involves taking the prior account balance as of December 31 and dividing it by a life expectancy factor published by the IRS.

Recent changes under the SECURE 2.0 Act, effective December 29, 2022, clarified the Required Beginning Date for participants born in 1951. Initially scheduled for April 1, 2024, the SECURE 2.0 Act adjusted the RMD age to 73, causing a one-year delay in RMDs. The IRS granted transitional relief for those participants who had already received RMDs in 2023.

Participants born in 1951 were allowed a 60-day rollover for RMDs processed from January 1, 2023, to July 31, 2023. They had until September 30, 2023, to roll over their "mischaracterized RMDs." This relief aimed to rectify situations where the distribution violated plan document terms due to the absence of an RMD requirement.

Understanding these changes to RMDs is vital for plan participants and administrators, ensuring compliance and navigating the nuances of these evolving regulations. 

Contact your Marsh McLennan Agency retirement plan advisor for information about SECURE 2.0 Act and how it affects your organization.