SECURE Act 2.0: Changes to Required Minimum Distribution Rules

On December 23rd, 2022, Congress passed the Consolidated Appropriations Act of 2023, and was signed into law by President Biden. This bill provides the Federal government with a whopping $1.7 trillion of new spending! Attached to this spending package is new retirement legislation referred to as SECURE Act 2.0.

What Is The Secure Act 2.0

The SECURE Act 2.0 builds on previous legislation passed in 2019 under the SECURE Act 1.0. The main goal of this retirement legislation is to strengthen and “simplify” America’s retirement system and, more importantly, to help Americans save for retirement. While the Secure Act 2.0 contains many provisions, it does not usher in the same number of changes that the original SECURE Act did in 2019. However, some important changes in the Act, especially to the required minimum distribution (RMD) rules, will impact many people who are close to or in retirement.

Required minimum distributions were introduced into law under the Tax Reform Act of 1986. According to this Act, once a person attains the age of 70 ½, they will be required to distribute a minimum amount from their Traditional IRAs and Traditional 401(k)s annually. The withdrawal amount is calculated by dividing the year-end account balance by a life expectancy factor that the IRS publishes.

The Increase

Thirty-three years later, Congress changed the rules and increased the RMD age from 70 ½ to 72, under the SECURE Act 1.0. Now, thanks to the SECURE Act 2.0, Congress has once again changed the rules. Starting in January 2023, the RMD age will now be 73. In addition, the RMD age will increase again in January 2033 to age 75. However, if you turned 72 in 2022 or earlier, you will need to continue taking RMDs as scheduled. Below you will find a summary of when RMDs must begin based on the birth year.

If you were born in 1950 or earlier, you must start taking your RMD at age 72,
If you were born between 1951 and 1959, you must start taking your RMD at age 73,
If you were born in 1960 or later, you must start taking your RMD at age 75.
Another nice feature in the SECURE Act 2.0 is a reduction in the penalty associated with missing an RMD in any particular year. Starting in 2023, the penalty for not taking the RMD will be reduced to 25% (from 50%) of the RMD amount not taken. The penalty will further be reduced to 10% for those that correct the mistake in a timely fashion.

These RMD changes are a welcome relief for pre-retirees and retirees. This is especially true for those that have been taking advantage of Roth conversions over the past few years. With SECURE Act 2.0, you may have some additional years to convert to a Roth IRA. In addition, for those that do not need their RMD money to meet their lifestyle expenses, you will now be able to get a few more years of tax deferral and delay the income taxes associated with RMDs.