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Monday June 17, 2024

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IRS Highlights New Required Minimum Distribution (RMD) Rules

In IR-2023-246, the Internal Revenue Service (IRS) reminded individuals born before 1951 to take a required minimum distribution (RMD) from their IRA or other qualified retirement plan. The first RMD may be taken in 2023 or until April 1, 2024.

Individuals born before 1951 turn age 73 in 2023. The Secure 2.0 Act raised the RMD age from 72 to 73. Those individuals who were born during 1951 must take their first required distribution by April 1, 2025.

The IRS reminds owners of IRAs and other retirement plans that there are several different types of plans and different rules for those individuals.

1. IRA Owners — The basic rule for an IRA owner is that under Secure 2.0 Act rules he or she must take an RMD every year after reaching age 73.

2. Roth IRA Owners — Those individuals who own a Roth IRA have contributed after-tax dollars to the Roth. They eventually will be able to withdraw the contributions and earnings tax free. Roth IRA owners are not required to take an RMD during their lifetime. They may allow the Roth to grow tax-free until they pass away.

3. Qualified Retirement Plans — There are a multitude of employer-sponsored retirement plans. These may include profit-sharing plans, 401(k) plans, 403(b) plans or 457(b) plans. Most participants in employer-sponsored retirement plans can delay RMDs until they retire. The exception is an individual who is a 5% or more owner of the business. Even if a business owner is still working, RMDs must start at age 73.

4. 401(k) or 403(b) Roth Plans — Some individuals have an employer who allows their voluntary contributions to be allocated to a Roth plan through a 401(k) or 403(b) account. These plans will require an RMD for 2023. However, in 2024 and later years the 401(k) or 403(b) Roth plans will not require an RMD.

The IRA trustee or administrator is required to calculate and report the RMD to each IRA owner. The individual who owns multiple IRAs must calculate a total RMD but may withdraw that amount from any of the IRA accounts. The IRA trustee or administrator may calculate an RMD, but the account owner is responsible for taking the correct amount.

Under Secure 2.0, the penalty for failure to take the full amount of the RMD is reduced from 50% to 25% of the amount not withdrawn. This can be reduced further to a tax of 10%, if the error is corrected within two years.

An individual who inherits an IRA will generally be subject to distribution requirements the year after he or she has received the account. For individuals who inherited in 2020 or later years, there is generally a requirement to fully distribute the account within 10 years of the death of the account holder. While the IRS has published a proposed ruling that suggested it may be necessary to take minimum distributions during the ten-year period, it has waived those distribution requirements for 2023.

There are four exceptions to the ten-year RMD rule. A surviving spouse, minor child, and disabled individual or chronically ill person may qualify for a different plan. The disabled or chronically ill individual may use the prior distribution-over-life-expectancy method.

There is further information on required minimum distributions and explanations on how to calculate the RMD for an inherited IRA in Publication 559, Survivors, Executors and Administrators.

Published December 22, 2023
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The Lutheran Church-Missouri Synod Mission Advancement utilizes the services of the LCMS Foundation as our partner for gift planning legal support and trust management.