Traditional IRAs and 401(k) plans allow employees to save pre-tax dollars for retirement. Any contributions may be deducted from gross income, provided the modified adjusted gross income does not exceed the limits imposed by the IRS. This results in a smaller tax bill at that time, but taxes cannot be deferred indefinitely.
Required minimum distributions (RMDs) are mandatory withdrawals that investors must make on an annual basis from traditional IRAs and other deferred retirement accounts. Importantly, the Secure 2.0 Act passed in 2022 changed certain RMD rules. Here are two particularly important changes that have been made recently that every investor should know about before 2025.
Traditionally, required minimum distributions (RMDs) have begun at age 70 and 1/2 (born before July 1949) or at age 72 (born between July 1949 and December 1950). But the Secure 2.0 Act raised the starting age to 73 for individuals born in 1951 or later. The RMD rules apply to account holders and beneficiaries of the plans below:
In most cases, RMDs must be completed by December 31 each year, but there are exceptions to the rule. For example, the first RMD can be postponed until April 1 of the following year. But individuals who delay the first RMD must still take the second RMD by December 31 of that same year.
This is what changed in 2024: Individuals born in 1951 or later must begin withdrawing RMDs annually from deferred retirement accounts during the year they turn 73. Importantly, the first RMD can be postponed until April 1 of the following year. This means that anyone who turns 73 in 2024 must complete their first RMD before April 1, 2025. But regardless of whether the first mandatory withdrawal is postponed until April, the second must be completed by December 31, 2025.
Designated Roth accounts in 401(k) and 403(b) plans were subject to RMD rules in 2023, but that changed in 2024 as a result of the Secure 2.0 Act. Specifically, the IRS no longer requires account holders of these plans to make withdrawals during their lifetime. However, their beneficiaries (even Roth IRA beneficiaries) must still follow the RMD rules.
Importantly, individuals who fail to withdraw the full RMD amount before the due date will be subject to excise tax. That essentially means they forfeit a percentage of the unwithdrawn amount and still have to collect the full RMD. The excise tax was 50% before 2023, but was reduced to 25% by the Secure 2.0 Act. If the error is corrected within two years, it can be further reduced to 10%. Anyone in that position must file a Form 5329 with their federal tax return for the year in which the RMD was required but not taken.
