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January 19, 2023

Required Minimum Distributions in 2023
David Hicks

Are you aware of the changes to required minimum distribution (RMD) rules for retirement accounts, including employer-sponsored retirement plans like 401(k)s, traditional IRAs, SEP IRAs, and inherited (but not owned) Roth IRAs in 2023?

These rules have undergone several changes in recent years, starting with 2019’s SECURE Act, so it’s understandable if you’ve had trouble keeping up.

Here’s a look at the key changes to required minimum distribution rules that went into effect on January 1, what you can do to ensure you take your full distribution, and how to correct a mistake:

Recent Changes to Required Minimum Distribution Rules

Starting age has increased again.

The SECURE Act mentioned above increased the RMD age from 70 ½ to 72 starting in 2020, but in 2022, the SECURE ACT 2.0 became law, bringing additional changes.

For 2023, you only have to start taking the required minimum distributions if you’ll be turning 73 instead of 72. Deadlines have not changed; if you’re turning 73 this year, you must take your RMD by April 1. If you’re already taking the required minimum distributions, your deadline remains December 31.

The penalty for not taking an RMD is lower

Previously, the penalty for not taking your required minimum distribution was a stiff 50% of the difference between the amount you took and the amount you were supposed to take. For example, if your RMD in 2022 was $15,000, and you only took $10,000, you would have had to pay a $2,500 penalty (50% of the $5,000 difference).

For 2023, that penalty drops to 25% — and drops further to a mere 10% if you take the amount you were supposed to take within two years. Under the new rules, the potential penalty in the above example drops to a maximum of $1,250, and a mere $500 if corrected quickly.

Special RMD Considerations for Inherited Retirement Accounts

The SECURE Act changed how inherited IRAs are treated and made things somewhat confusing by creating separate rules for IRAs inherited before 2020 and those inherited after 2020.

There are also separate rules for spousal beneficiaries versus non-spousal beneficiaries The main difference here is that spousal beneficiaries are able to use only their own life expectancy for calculating RMD amounts. Non-spousal beneficiaries have to calculate based on the longer of their own life expectancy or the account owner’s remaining life expectancy.

RMD rules for accounts inherited before 2020:

Given the time that passed, if you inherited a retirement account before 2020, you likely have already included it in your required minimum distribution calculations — especially if the original account holder was required to take RMDs. However, if you opted to follow the five-year rule — that is, you will empty the account by the 5th year after the account holder’s death — make sure to draw down any account inherited from someone that died in 2017 (2020 does not count for calculating the five years)

RMD rules for accounts inherited after 2020:

The major difference for accounts inherited after 2020 is that the five-year rule becomes the 10-year rule.

Additionally, non-spousal beneficiaries are divided into “eligible designated beneficiary” and “designated beneficiary.” Eligible designated beneficiaries include minor children, disabled or chronically ill individuals, and individuals not more than 10 years younger than the original account owner. They can follow the 10-year rule or take RMDs based on the life expectancy calculation; other individual beneficiaries are limited to following the 10-year rule. Non-individual beneficiaries such as trusts have to follow pre-2020 rules).

How to Calculate Your RMD

The IRS provides several worksheets to calculate required minimum distributions. If you have multiple retirement accounts, it’s best to work with a tax professional or financial advisor to make this calculation.

Plan Ahead to Stay Compliant

Even though the penalty for not taking a sufficient amount to satisfy your RMD requirement has been significantly lowered, and RMDs can be taken later, nobody wants to give the government more money — or be caught off guard by how much money they need to take out of their retirement account.

Working with a financial advisor to create a comprehensive financial plan will help protect your retirement from unwanted surprises while reducing your stress levels at tax time — and potentially reducing your overall tax liability in the process.

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