Secure Act 2.0 – How Your Retirement Plan is Affected
The Secure Act 2.0 impacts your retirement planning, and it has some major updates to it, including required minimum distributions (RMDs). Since the Act was just passed at the end of 2022 and is now in effect, it’s important that we discuss these key changes with you.
Secure Act 2.0 and Changes to Your Required Minimum Distribution
When you funnel money into your traditional IRA, 401(k), 403(b) or 457, you defer your taxes and make an “agreement” with the IRS. The agreement is sort of a handshake-type deal that allows you to defer your taxes on the basis that you will, at a certain age, be required to take a certain percentage out of your tax-deferred account, called an RMD.
The IRS wants you to begin paying taxes on the funds that you deferred, and you will only pay money when the money has been distributed to you.
However, it’s important to note that:
- You’re not required to spend the money
- You can reinvest the money once you have paid taxes on it
We’re going to review the changes in the age that you need to start taking these distributions. The IRS has made this a bit complicated with the rules and regulations in place, but we’re going to make it as simple as possible for you.
Note: None of this is for your Roth 401(k) or IRA, which are not tax-deferred. Instead, these changes are only for accounts that you have where you’ve been able to defer your taxes.
Changes Today vs. Before the Secure Act 2.0
Before the current changes, the age that you were required to take your RMD was 70 ½. Why the half is included, we don’t know, but in the year that you turn 70 ½, you needed to take these RMDs from your tax-deferred accounts.
Every year forward, you would need to take a distribution from these accounts.
However, as of December 29, 2022, the age for RMDs has changed thanks to the Secure Act 2.0. The new rules for RMDs are:
- Born in 1950 or earlier, you should have already been taking your RMDs and nothing has changed for you.
- Reached age 72 in 2022. You should have taken your RMD or had the option to defer it until April 1, 2023. (More on this below).
- Born 1951 – 1959, you need to begin taking your RMDs at the year you reach age 73.
- Born 1959 and after, you need to begin taking your RMDs at age 75.
Deferring RMDs Using the Required Beginning Date
The IRS allows you to use your required beginning date to your advantage. According to current IRS rules, you can do the following just one:
- Start taking your RMDs when you hit the specified age
- Begin taking your RMDs on April 1 of the following year
For example, let’s assume that you turned 72 in 2022. In this case, you could have:
- Taken your RMD before December 31, 2022
- Taken your first RMD on April 1, 2023
If you defer the payment, you will not have to pay taxes on these funds for 2022. However, in 2023, if you deferred the payment, you will be taking your:
- 2022 payment
- 2023 payment
In 2023, you would have two distributions, which you’ll need to pay taxes on. Most people who have high incomes and are working in 2022 would want to consider deferring payment so that they don’t hit a higher tax bracket and have to pay a larger tax percentage.
Otherwise, it often doesn’t make sense to defer your first RMD payment.
With all of this said, you can only defer your first payment and will be required to take an RMD for every subsequent year that passes.
Examples of RMDs After the Secure Act 2.0
Jane Born in 1950
Jane turned 72 in 2022, meaning that she is required to take an RMD in 2022 or on April 1, 2023. If Jane does defer until April 1, she will need to take another RMD by December 31, 2023.
Tom Born in 1951
Tom will need to start taking his RMDs for 2024 when he turns 73. He can also defer this RMD until April 1, 2025.
Sandy Born in 1960
Sandy is 63 right now in 2023, and she is not close to the RMD age yet. However, she is under the Secure Act 2.0 and will need to take her RMD in 2035 when she hits 75. She can also defer her first RMD until April 1, 2036.
Note: You need to take your RMD no matter the time of year you were born. If you were born on December 30, you still need to take your distribution.
What Happens If You Miss Your RMD for the Year?
The IRS says that if you miss your RMD, there can be a penalty. We’ve seen people take their RMD late and make their tax payments, waiving this penalty in the past. However, you never know if the IRS will become less lenient and stop waiving these penalties.
If you turn 72 in 2022 and don’t take your RMD until after April 1, you need to:
- Speak to us
- Speak to an accountant
You can’t run from the IRS, so it’s better to rectify the matter now if you missed your RMD.
Secure Act 2.0 Only Matters If You’re Not in Your RMD
If you don’t fall within the new age brackets and are already taking your RMDs, the new Secure Act will not impact you at all.
RMD Logistics and Taking Your RMD
RMDs are based on your 1231 account values, and this figure is reported to the IRS. Instead of working through complicated calculations, call your advisor or the institution that is holding your money and ask them.
They will have the calculation done for you and be able to tell you how much you’re required to take out of your account(s).
In terms of how to take out your money, some clients will:
- Take their RMD and then divide it by 12 to have a monthly payment
- Withhold federal and state taxes
- Take a lump sum, quarterly distribution, bi-annual distribution, etc.
You’ll need to sit down and determine the best way to take your distribution for you.
If you have any confusion about the Secure Act 2.0, we ask that you schedule a call with us, and we’ll be more than happy to answer any of the questions that you have.
Want a little more guidance on ways to secure your retirement?