RMDs: Retirement Money Disappearances

Navigating the world of retirement accounts can be overwhelming, especially when it comes to understanding Required Minimum Distributions (RMDs). In this blog post, we will clarify what RMDs are, why they exist, and how recent changes from the Secure Act 2.0 impact your retirement planning.

What are Required Minimum Distributions?

Required Minimum Distributions (RMDs) are the minimum amounts that retirement account owners must withdraw annually starting at a certain age. These withdrawals apply to traditional IRAs, 401(k)s, and other retirement plans. The IRS mandates RMDs to ensure that individuals eventually pay taxes on their retirement savings, which grow tax-deferred.

Why Do RMDs Exist?

The primary purpose of RMDs is to ensure that individuals do not defer taxes indefinitely. When you contribute to a traditional retirement account, you typically do so with pre-tax dollars, allowing your investments to grow without immediate tax implications. However, the government eventually wants to collect taxes on that income, which is achieved through RMDs.

Recent Changes with Secure Act 2.0

The Secure Act 2.0, enacted in late 2022, made significant changes to RMD rules, including:

• Increased Age for RMDs: The act raised the age at which individuals must start taking RMDs from 72 to 73, effective January 1, 2023. This change gives retirees an additional year to allow their investments to grow tax-deferred.
• Future Changes: Beginning in 2033, the age will increase again to 75.
• Reduced Penalty for Missed RMDs: The penalty for failing to take an RMD has been reduced from 50% to 25%, providing some relief to those who miss the deadline.
• Roth 401(k) RMDs: Previously, Roth 401(k) accounts were subject to RMDs, but under the new law, Roth accounts are exempt from RMDs during the owner’s lifetime.

Conclusion

Understanding RMDs and the recent changes from Secure Act 2.0 is essential for effective retirement planning, but also may have an impact upon your legacy and estate planning. Knowing when and how much to withdraw from your retirement accounts, you can better manage your tax liabilities and make the most of your retirement savings as well as understand how these factors impact your beneficiaries. Reach out to a trusted advisor for additional support with regard to your particular situation.

* Information regarding RMDs can be found on the Internal Revenue’s website.