Is it, or will it be age 70½, 72, 73 or 75? Let’s explore these possibilities. Required minimum distributions (RMDs) from qualified retirement accounts started with the passage of The Tax Reform Act of 1986. That law established the date when RMDs were required to begin as the year in which an individual reached age 70½. This remained the compulsory age for RMDs for more than thirty years; however, the compulsory age has now changed twice in the space of three years.

Related Read: RMDs are Back: Here is How to Soften the Tax Blow

take a look

First, the 2019 SECURE Act increased it to age 72 starting in 2020 (for those turning 70½ or older in 2020 or later). Then, three years later, SECURE Act 2.0 of 2022 came along and raised the mandatory age at which RMDs must begin, once again.

Now any individual who turns age 72 after December 31, 2022, and reaches age 73 before January 1, 2033, will have a compulsory RMD age of 73. Taking it one step further, the law ups the RMD age to 75 for an individual who turns age 74 after December 31, 2032.

The following table illustrates the many ages at which RMDs are or were required to begin under the various legislation:

Looking solely at 2023, individuals that turn age 73 this year must take a RMD in 2023 or no later than April 1, 2024. On the other hand, anyone who turns age 72 in 2023 will not have a RMD in 2023. Instead, RMDs begin in 2024 and no later than April 1, 2025. The IRS recently clarified this in Notice 2023-23.

In other words, if you have already started RMDs in a prior year, you need to continue withdrawing your RMDs based on your life expectancy. The one change made by the IRS last year was the life expectancy used in calculating your RMD. The IRS updated the tables for 2022, which lowered RMDs due to longer life expectancies.

Finally, beginning in 2033, RMDs will start at age 75. Now that you know your RMD age, let’s turn to your withdrawals.

Related Read: How will SECURE 2.0 Affect Your Retirement Plan Administration?

pay close attention to your rmd withdrawals

The SECURE Act not only raised the age when you need to take RMDs, it changed a couple of other important rules that deal with missed RMDs. Up until now, if you missed taking your RMD, you were potentially subject to a whopping 50% penalty. Not only that, if you missed your RMDs for the past five years, for example, you had to correct all those missed years.

The penalty for missed RMDs was lowered to 25% of the missed RMD amount under the Act. The new penalty could be as low as 10% if the missed RMD is corrected in a timely manner. To be timely corrected means by the end of the second year after the missed RMD, or earlier if the IRS has assessed a penalty.

In the above example where you missed RMDs for five years, you could request a waiver of the 50% penalty through a reasonable cause explanation. Even in cases like this, the IRS was very generous in waiving the 50% penalty. The IRS would only assess the penalty in very egregious instances. Basically, you would not end up with a penalty if you requested a waiver with reasonable cause and took action to correct the missed RMDs, even from five years ago.

This is an unknown now, but the IRS may not be as generous in the future with the lower penalties in place. They may start assessing the new lower penalties for missed RMDs. Heed the advice here and make sure you are diligent about taking your RMDs, or risk assessment of a 10% penalty. This penalty will be on top of the income taxes you will need to pay on the missed RMD, which could also throw you into a higher tax bracket with extra RMD withdrawals in the same year. This applies to both the qualified retirement account holder and any beneficiary of an inherited retirement account.

A welcoming change (or perhaps not)

One welcome change made in SECURE 2.0 was the shortening of the statute of limitations for retirement plan penalties. IRS Form 5329 reports additional taxes on qualified retirement plans. It is also used to request a waiver of the 50% penalty for missed RMDs. This form regularly is overlooked and may never get filed due to lack of its awareness. Prior to this change, if you never file Form 5329 to request a missed RMD waiver, the statute of limitations keeps running.

Under SECURE 2.0, the IRS corrected this by basing it on the filing of Form 1040, regardless of whether Form 5329 was ever filed. The statute is now limited to three years for missed RMDs. Of course, this may be another sign that the IRS will tighten up their enforcement on missed RMDs with the shortened time frame.

Related Read: Worried You Do Not Have Enough to Retire? Consider Working a Little Longer

Get up TO SPEED

SECURE Act 2.0 changes to RMDs sound like welcoming news with higher RMD ages, lower penalties and shortened statute of limitations. In addition, last year the IRS provided us with longer life expectancies in their updated tables. This all sounds great; however, these changes can be confusing and do add a certain amount of complexity.

Now that you know your RMD age, they also are a reminder to take care of your RMD withdrawals in a timely manner. Although we do not yet know how the IRS will enforce these changes, a word to the wise is to get up to speed on your RMDs.

For more information, contact your ORBA advisor at 312.670.7444. Visit ORBA.com to learn more about our Wealth Management Services.