Retirement accounts: Sorting out new rules for required minimum distributions (RMDs)

Dear Savvy Senior: What are the new rules on required minimum distributions from IRAs and 401(k)s? I will turn 72 this year and want to be clear on what I’m required to do. — Planning Ahead

Dear Planning: Thanks to the SECURE Act 2.0 that was passed by Congress in December, there are several new rules that affect required minimum distributions (RMDs) from traditional IRAs, 401(k)s and other tax-deferred retirement accounts. These changes, which build on the original SECURE Act of 2019, benefit retirees by increasing the RMD age and lowering the penalty for missing a withdrawal. Here’s what you should know.

New RMD rules

As of Jan. 1, the starting age for taking RMDs is 73, up from 72. And it rises to age 75 in 2033. This change means that if you turn 72 this year, you can delay your RMDs one more year, allowing your savings in these accounts to grow longer, tax deferred.

But once you turn 73, you must start taking annual RMDs from the tax-deferred retirement accounts you own — such as traditional IRAs, SEP IRAs, SIMPLE IRAs, 401(k)s, 403(b)s and 457(b)s — and pay taxes on those withdrawals. Distributions are taxed as ordinary income in your tax bracket.

There are a few exceptions, however. Owners of Roth IRAs are not required to take a distribution, unless the Roth is inherited. And starting in 2024, Roth 401(k)s will not be subject to RMDs either.

There’s also a work waiver for RMDs you should know about. If you are still working beyond age 73, and you don’t own 5 percent or more of the company you work for, you can delay withdrawals from your employer’s retirement plan until after you retire. But if you have other non-work-related accounts, such as a traditional IRA or a 401(k) from a previous employer, you are still required to take RMDs from them after age 73, even if you’re still working.

Deadlines and penalties

Generally, you must take your distribution every year by Dec. 31. Though first-timers can choose to delay taking their distribution until April 1 of the year following their 73rd birthday. But be careful about delaying, because if you delay your first distribution, it may push you into a higher tax bracket because you must take your next distribution by Dec. 31 of the same year.

Also, note that you can always withdraw more than the required amount, but if you don’t take out the minimum, you’ll be hit with a 25 percent penalty (it had been 50 percent) on the amount that you failed to withdraw, along with the income tax you owe on it. This penalty drops to 10 percent if you take the necessary RMD by the end of the second year following the year it was due.

Distribution amounts

Your RMD is calculated by dividing your tax-deferred retirement account balance as of Dec. 31 of the previous year, by an IRS estimate of your life expectancy.

IRA withdrawals must be calculated for each IRA you own, but you can withdraw the money from any IRA or combination of IRAs. If you own 403(b) accounts, they allow you to total the RMDs and take them from any account or combination of accounts.

With 401(k) plans, however, you must calculate the RMD for each plan and withdraw the appropriate amount from each account.

To calculate your RMD, use the worksheets on the IRS website — see IRS.gov/Retirement-Plans, and click on “Required Minimum Distributions.” For more information, review “Distributions from Individual Retirement Arrangements” at IRS.gov/pub/irs-pdf/p590b.pdf.

Send your senior questions to: Savvy Senior, P.O. Box 5443, Norman, OK 73070, or visit SavvySenior.org.