Ep. 194 – Secure Act 2.0 – How Your Retirement Plan is Affected
Are you curious about how your retirement plan is affected by the Secure Act 2.0? The Secure Act 2.0 was just passed at the end of the calendar year 2022 with some major updates on it.
The Secure Act 2.0 has changed things around when to take your Required Minimum Distributions from now moving forward.
In this episode of the Secure Your Retirement podcast, we discuss how the Secure Act 2.0 will affect your retirement plan. Listen in to understand more about the right time to take RMDs and the rules around Required Beginning Date (RBD).
In this episode, find out:
- How the age of taking RMDs has shifted from seventy-two to seventy-three and five.
- The Required Beginning Date (RBD) and the rules around it if you choose to defer your RMDs.
- We share some examples to help you understand when to take your RMDs as per the Secure Act 2.0.
- Why you need the help of a professional if you miss taking your RMD.
- The formula to take your RMD and the frequency in which to take it.
- “If you reached age seventy-two after the year 2022 has ended, there’s no RMD for your IRA in 2023.”– Murs Tariq
- “Do not think you get to skip 2023 if you’re already in your Required Minimum Distribution.”– Radon Stancil
If you are in or nearing retirement and you want to gain clarity on what questions you should be asking, learn what the biggest retirement myths are, and identify what you can do to achieve peace of mind for your retirement, get started today by requesting our complimentary video course, Four Steps to Secure Your Retirement!
Here’s the full transcript:
|Radon Stancil:||Welcome to our Secure Your Retirement Podcast. Today we are going to be tackling a topic that is obviously one of the most exciting topics you could ever tackle and that is a tax update. So, you know that I’m being sarcastic here when I say it’s going to be exciting, but it is essential, let me say it that way. It is essential, it’s something that you need to understand, and you’ve probably heard some information on this already. We just wanted to reiterate how it works and particularly when it comes to one type of distribution that we are required to do. The topic that we’re going to be discussing today is the SECURE Act, the SECURE Act 2.0 and what that means, there’s a lot of different updates within the tax code around this particular secure act. But today we are just going to be talking about the required minimum distribution.|
|You might hear some people say RMD, which is just the acronym required minimum distribution. So, throughout this, we will probably say RMD. So, keep that in mind. So, the idea is, and if you got to get a little bit of context here is that when we put money over into a traditional IRA, a traditional 401K, 403B, 457, any one of those types of employer type places where I defer my taxes, I kind of make a handshake deal without shaking the hand of the IRS. I kind of make an agreement that when I put my money in there, I do not have to pay taxes on it. I can defer those taxes into the future. And then, what the government says at some point in the future, there is a set age and a required minimum distribution or RMD that you have to take out of the IRA.|
|And if you think about it, why do they do that? They do that because they want to start collecting the tax money. They want to start getting you where you don’t have to spend the money, you just have to take it out of that plan, pay the taxes on it, and then you can reinvest the difference. And there’s a mathematical equation to do that. We’re going to review that with you briefly today. But those required beginning dates or the age at which I have to take the distribution has shifted and they’ve shifted in the past and now they’ve shifted again with this SECURE Act and true to the IRS. They don’t make it super simple. So, we’re going to walk you through how this works. We wish that they could just do things super simple, but I always say there’s about… In my mind, there’s a group of people sitting around a big table at the IRS and they’re coming up with IRS rules and they say, “Hey guys, we can’t make this super simple because then it makes our job look like we are not really needed.”|
|So, let’s make this thing complicated where we need a lot of help. I don’t think that’s probably the truth, but at least it’s what it seems like to me. So, here’s what we’re going to do. We’re going to talk about this required… Beginning date, some of the changes. We’re going to walk you through some examples so you can understand it. I will just want to remind you that all of this is going to be written out in a blog. So, you’ll have all these notes that you can refer back to. And then, we’re going to conclude with a little bit of the logistics. How is it that we do this? How did it affect us? So, let’s kind of jump into this first section here about the new changes when it comes to the required minimum distribution. So, Murs, can you help us with that particular part?|
|Murs Tariq:||Yeah. And I think to understand the changes today, it’s going to be good to understand where we came from as well. And so, for the longest time that RMD, the required minimum distribution was when you reached age 70 and a half. And don’t ask me why, don’t ask Radon why they say 70 and a half, but it was in the year in which you turned 70 and a half is when you had to start taking those required minimums from your pre-tax assets like IRAs and 401Ks and then every year going forward you’re required to take those dollars out.|
|Radon Stancil:||Sorry, you know what? I missed something, Murs, and I didn’t mean to cut you off here. I just want to make sure it was real clear that any of what we’re talking about right now does not apply to things like a Roth IRA or a Roth 401K. And that’s when I said traditional, I meant to explain traditional, traditional means the deferment of taxes, whereas that’s not with a Roth or a Roth 401K. Sorry, I forgot that early.|
|Murs Tariq:||Yeah. No, that’s a good distinction to make. Yeah, this is all pre-tax assets because the Roth accounts, they’re already tax free. So, there’s no tax revenue to be gotten from those accounts for the IRS. Although, imagine right, if you have done a good job saving and you have amassed a million-dollar 401K or IRA, that’s a million dollars that the government never received any tax revenue from. So, take that and multiply it by the millions of people out there that do have assets like that. That’s a substantial year-over-year tax revenue that can be generated.|
|So, for the longest time it was age 70 and a half. And then, in 2019 Congress came out with SECURE Act, the original SECURE Act which pushed it to age 72 up from age 70 and a half. So, the year in which he turned 72 and just as we started to get used to that concept here recently on December 29th, 2022, Congress made another change and came out with the SECURE Act 2.0 and now this is changing the age in a couple different fashions. So, here’s the layout of it for RMDs going forward. Basically, we like to go off of years you were born.|
|So, if you were born in 1950 or earlier, you should have already been taking your RMDs and nothing’s really changing for you going forward as far as your RMDs go. If you just reached age 72 in 2022, you should have taken an RMD in 2022. Or there is a caveat, which we will explain in a little bit about that. There is a potential where you could actually defer that until April 1st of this year, 2023. So, if you reach age 72 in calendar year 2022, you should have taken an RMD or you have one coming up in April 1st of this year.|
|And then, there’s a nuance there that you got to understand when you’re making that decision, we’ll talk about that as well. But here’s where the new piece is coming into play. If you were born in 1959 and after… I’m sorry, I skipped one here. If you were born from 1951 to 1959, you must start taking your RMDs the year in which you reach age 73. So, the old rule was 72. Now, it’s the year in which you reach age 73. If you were be born between 1951 and 1959. So already, I’m throwing a lot of numbers at you. I know it’s going to be a little bit confusing and something to get used to, but once you’re in the RMD age, you’re in the RMD age. So, you’re born from 1951 to 1959. It is the year in which you turn 73 that you have to start your required minimum distributions.|
|And then, for 1959 and after, so basically 1960 and up, you are required to start taking your RMDs at age 75. So, it jumps from age 73 to age 75, if you were born 1959 and after. And there’s a tiny little caveat there as well that the IRS has going to give us some more information on. But 1959 and after, just know there’s a good chance that you are taking at age 75.|
|Okay. So, I know I threw a bunch of numbers at you, and I also said there is this thing that you got to understand about RMD and it’s in the age, the year in which you reach an age, but there is a way to defer it and it’s only once. And so, Radon, you want to walk them through that little caveat.|
|Radon Stancil:||So, this is all in reference to what is called the required beginning date or RBD, right. Required beginning. So, think about it, this is the very first time I have to take my required minimum distribution. So, all of what Murs just said doesn’t matter if my age was 72 in 2022 or if I’m going to be 73 after that or 75 in the later version of this required minimum distribution. The way that IRS says it works is this, “If in fact whatever year I turn those, one of those ages that’s my beginning year, I can take my required minimum distribution the year I turn that age or that very first year, I can wait till April 1st of the following year.” So, let me just walk you through a very quick example. Let’s say that I had turned 72 in the year 2022, which means you are now required to take your minimum distribution.|
|You could have just taken the distribution in 2022 somewhere before December 31st, or you could have deferred, and you now have till April 1st of this year to take that very first distribution. So, somebody might say on the first part of that, just delay it. That way, I don’t have to put it in 2022, I don’t have to pay taxes on it 2022, do it. Just make it, let’s defer it. Well, hold on a second. There’s an asterisk that we have to put there now or a point that we have to make. The next year, now 2023, if I did not take my 2022 in 2022 and I waited until April 1st, now I have to take the April 1st distribution for 2022. But I am still required to take my 2023 distribution. So, by waiting, I now am going to have two distributions in 2023. So, you can just imagine now, unless I was working in 2022 with a very high income, that’s probably the only reason why I should have deferred it into the next year.|
|If I didn’t have that, I should have went ahead and taken it, so that I don’t have double distributions in a year. I don’t think the IRS does a real nice job of explaining that. The first thing is, hey, just defer it, wait till April 1st if you want to, but now I got to take two of them. But again, that’s the rules told you it’s not that simple, but that’s the way it works. So, what we’re going to do now is we’re going to work through three different examples just to help you to illustrate how it would work based on these different ages that Murs just talked about prior.|
|Murs Tariq:||All right, so the first example is about Jane. Jane was born in 1950, which means that she turned age 72 last year in 2022. So, in this world, she is under the old SECURE Act which required that you take it in the year in which you turn 72. So, she is required to take an RMD for calendar year 2022. But what Radon just kind of walked us through is there is a caveat. So, she has two options. One is that she takes the RMD by 12/31/2022. The other is she has the ability to defer it until April 1st, 2023. But realize that Jane, if you decide to defer, you can defer it till April 1st, 2023, but you will also have to take another RMD by December 31st, 2023. Therein you’ve got the double RMD in the calendar year 2023.|
|And so, whether or not that makes sense, it’s kind of up to her and to see how much money she can take in for that year. But that’s one example. Ultimately saying, if you were born in 1950 and you reached age 72 last year, you’re under the old SECURE Act, RMD rules of age 72.|
|Radon Stancil:||And if you’re listening to this, Jane, if you didn’t take your distribution last year, you got to take two of them this year. Okay.|
|Murs Tariq:||Okay. Yeah.|
|Radon Stancil:||So, if you missed it last year, you’re taking two this year. All right, let’s talk about example number two. Example number two is Tom. Tom was born in 1951. So now, in this particular case, Tom is going to need to take his required minimum distribution for 2024 when he turns 73 because he’s now under the new SECURE Act. Okay. So, he’s going to turn 73 in 2024. So, remember the rules on this. He can take his 2024 distribution anytime he’d like prior to December 31st. And by the way, it does not matter what month he was born. If you turn 73 anywhere in the year, I don’t care if it’s December 30th, you have to take a required minimum distribution that year.|
|That used to be really confusing because people thought that on the half number that it didn’t apply until they became the half. It doesn’t matter if you turn in that calendar year, you have to take your distribution that year or no later than April 1st of the following year. So, for Tom here, born in 1951, his first distribution’s born is going to be needed to be taken in 2024, no later than April 1st of the following year, 2025.|
|Murs Tariq:||All right. Now let’s talk about Danny. Danny was born in 1960 and which puts Danny at the age of 63 here in 2023. And so, she’s not close to the RMD age yet, but she wants to do some forecasting as to when she’s going to turn 75, and she’s born after 1960. So, that puts her into one of the new SECURE Act RMD rules, the SECURE Act 2.0. So, she’s under the 75 group, which means that she will have to take her first RMD in 2035 when she reaches the age of 75, not 73, not 72. And again, same rule applies that she can take it at the end of calendar year 2035, excuse me, or April 1st, 2036, but knowing that if she defers till April 1st, 2036, that she’s going to have to take a second RMD by the end of the calendar year 2036.|
|So, couple examples over there for you. I think the big thing to understand here is that if you reached age 72 after 2022 ended, there is no RMD for your IRA in 2023. I’m going to say it again. If you reached age 72 after the year 2022 has ended, there is no RMD for your IRA in 2023. So, a lot of you, I think we’re planning on turning 72 in this calendar year of 2023 and planning for your RMDs. Now, it’s something to think about and you don’t actually have to take it in 2023. So, that’s the big piece here. But you know what happens now, Radon, if we do miss our RMD for a year?|
|Radon Stancil:||Yeah. So, I’m just going to say it short and sweet. There could be a penalty. In fact, the IRS says there’s a penalty. I will tell you though, that a lot of times that can get waived if we pay it and we go ahead and do the distribution. But if that occurred, and let’s say you turned 72 in 2022 and didn’t take it and you miss it and you hear this and you forget about it and you don’t take it till after April, then you’re going to need to talk with us with a CPA with somebody and go, “Hey, I didn’t take my distribution and be able to deal with that.” Okay. One of the other little caveat that I’m going to say before we go through a little bit of logistics is, Murs talked about this whole idea of I’m in the new SECURE Act after 2022.|
|That’s only for folks turning the new age. Sometimes back when we went from 70 and a half to 72, people were really trying to say, does it apply to me now? And the answer is no. If I got into the old SECURE Act and I turned 72 in 2022, I’m in the old one. I don’t get to bump up to 73 and skip 2023. So, do not think you get to skip 2023 if you are already in your required minimum distribution, you’re on the old act. And so, you got to continue on, so. All right, let’s talk a little bit about logistics, Murs, and let’s say I am now at the age that I’m taking my required minimum distribution and I need to take it. What’s the best way to take it?|
|Murs Tariq:||Yeah, so we get the question all the time. One of the questions is, how do I know what my RMD is? And the easy answer there is a formula to it. It’s based off of the 12/31 balance of the account of the previous year. So, to figure out what your 2023 RMD is, it’s based off of 12/31/2022 account values. I’m not even going to tell you the formula because every institution is going to provide that number for you. One, because they report that number directly to the IRS. So, they say, “Hey, Jane has to take out 5,000 this year.” That is the RMD, so they report that to the IRS. They also have it available for you as well, so you can make sure you take out the right amount. So, if you’re curious as to what the number is, reach out to your advisor, reach out to the institution that holds the money, and they’re going to do that calculation for you.|
|As far as how to take the money, we have clients all over the place on this. We have some clients that like it for budgetary purposes, and so they’re going to take, say in that example, in this example. Let’s say it’s a $12,000 RMD. They’re going to take it monthly and they’re going to take a $1000 a month for the calendar year. So, they have a paycheck coming in almost a $1000 a month. One thing to note on RMDs is that you can withhold taxes because remember, none of these dollars have been taxed before. So, you can withhold federal and state withholdings on it, so that you don’t have a surprise tax time the next year.|
|The other frequencies are all available too. You could do quarterly if you wanted to. You could do biannually or annually, one-time lump sum. So, that’s for… However, you budget your household and whatever works best for you. And if you have questions around how that works or anything like that, anything around RMDs, we’re always happy to answer the logistics, the formulas, the calculations, or even the question of, “Hey, here’s how old I am. When do I actually have to take RMDs? Because these SECURE Acts are making me very confused.” We’re here to answer all of those.|
|Radon Stancil:||All right, everyone, we hope this has been beneficial. We look forward to providing a lot of information for you all the way through 2023. And if you have any questions, please visit our website. Go to the right-hand top corner. You can click on Schedule Call. It’s completely complimentary. You can hop on a call. Our schedule comes up, you can schedule it, and we would love to be able to chat with you, answer your questions, and as always, we’d love to hear your feedback. So, please send those in. Have a great week. We’ll talk to you again next Monday.|