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The Internal Revenue Service reminded those aged 73 and older of the deadline to take required minimum distributions (RMDs) from individual retirement arrangements (IRAs) and 401(k) before the Dec. 31 deadline – or face hefty penalties, the agency said in a Dec. 10 notice.
RMDs must be taken annually from IRAs, 401(k)s, 403(b)s and other retirement plans. These withdrawals are considered taxable income and may incur penalties if not taken on time. Failure to do so subjects the retiree to a 25% (down from 50%) excise tax on the amount not withdrawn, though the penalty drops to 10% if the shortfall is corrected within two years.
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Roth IRA owners are not required to take withdrawals during their lifetime, however beneficiaries are subject to the RMD rules after the account owner’s death.
SECURE 2.0
SECURE 2.0 raised the age to 73 in 2024, from 72, that account owners must begin taking RMDs, while eliminating RMDs for Designated Roth accounts in 401(k) and 403(b) retirement plans. In 2033, the RMD age will be extended to 75.
“Beginning in 2024, SECURE 2.0 allows a spouse beneficiary to elect to be treated as the ;employee’ for RMD purposes,” according to Rebecca Smolen and Amy Shkedy, co-founders of Bala Law Group. “Before this, the spouse had two options—they could either roll over the IRA into their own or could remain as a beneficiary by taking it in an inherited IRA (for younger spouses, the latter option would have the benefit of avoiding a 10% penalty if distributions might be needed before reaching age 59 ½).”
Related: IRS: New guidance on required minimum distributions, reflecting SECURE 2.0 changes
Employer-sponsored plans are also subject to RMD rules, but withdrawals can be delayed until retirement unless the participant owns more than 5% of the business. Designated Roth accounts in a 401(k) or 403(b) plan will not be subject to the RMD rules while the account owner is still alive for 2024.
In July, the Department of the Treasury and the Internal Revenue Service have issued final regulations updating the RMD rules, since the passage of SECURE 2.0 in 2023.
“Specifically, Treasury and IRS reviewed comments suggesting that a beneficiary of an individual who has started required annual distributions should not be required to continue those annual distributions if the remaining account balance is fully distributed within 10 years of the individual's death as required by the SECURE Act," said the IRS. "However, Treasury and IRS determined that the final regulations should retain the provision in the proposed regulations requiring such a beneficiary to continue receiving annual payments.”
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Lynn Cavanaugh
Lynn Varacalli Cavanaugh is Senior Editor, Retirement at BenefitsPRO. Prior, she was editor-in-chief of the What's New in Benefits & Compensation newsletter. She has worked for major firms in the employee benefits space, Vanguard and Willis Towers Watson, as well as top media companies, including Condé Nast and American Media.
