The SECURE 2.0 Act of 2022 (SECURE 2.0), enacted on December 29, 2022 as part of the Consolidated Appropriations Act of 2023, will impact retirement plan operations for years to come. Some provisions were effective as of the date of enactment and some will not be effective until 2027. This article focuses on changes made to the required minimum distributions rules under Internal Revenue Code Section 401(a)(9), which have various effective dates.
Required Beginning Date Age
Required minimum distributions (RMDs) from tax qualified plans (such as 401(k) plans), Section 403(b) plans, and governmental Section 457(b) plans, are required to commence no later than April 1 following the later of (i) attainment of the required beginning date age (under SECURE 2.0 referred to as the “applicable age”), or (ii) the date of actual retirement.[1] Prior to January 1, 2023, the applicable age was 72. Effective January 1, 2023, the applicable age is 73. Effective January 1, 2033, the applicable age is 75. A technical correction is required to clarify that the applicable age for individuals born in 1959 is 75. Presumably the technical correction will be made prior to 2032.
In Notice 2023-23, the IRS provides relief to financial institutions for reporting RMDs for 2023. Financial institutions are required to notify individuals of the RMD requirement by January 31 each year. Due to the late December enactment of SECURE 2.0, there was insufficient time to stop these notices going to individuals who turn 72 in 2023. As part of the relief, the IRS will not consider an RMD statement to an IRA owner who will attains age 72 in 2023 to have been provided incorrectly if the IRA owner is notified by the financial institution no later than April 28, 2023, that no RMD is actually required for 2023.
If you turn 72 in 2023, your required beginning date for RMDs from your IRA will be April 1, 2025, rather than April 1, 2024. You can ignore any RMD statement you may have received from your financial institution advising you differently.
RMDs Eliminated for Roth Accounts in Plans
Unlike Roth IRAs, where no RMD is required prior to the death of the account holder, RMDs are currently required to be made from designated Roth Accounts within 401(k), 403(b), and governmental 457(b) Plans before the death of the participant. SECURE 2.0 now extends the Roth IRA RMD rules to designated Roth Accounts in these plans so that no RMD is required with respect to such Roth Accounts beginning in 2024. Note that participants who turn 73 in 2023 are still required to take an RMD from their designated Roth Accounts by April 1, 2024.
Surviving Spouse as Sole Designated Beneficiary
Effective January 1, 2024, if the surviving spouse is the sole designated beneficiary of a participant or IRA account holder who has not started to receive retirement benefit payments, the surviving spouse may defer commencement of benefit payments until the deceased participant’s applicable age (e.g., 73 or 75). In addition, if such surviving spouse chooses to defer commencement of benefit payments, the distribution period for benefit payments to the surviving spouse shall be determined under the uniform lifetime table rather than the single life table. The uniform lifetime table provides for a longer distribution period than permitted under the single life table.
Correction Period and Excise Taxes re Missed RMDs
Prior to the enactment of SECURE 2.0, if a participant or IRA account holder failed to take an RMD or did not take a distribution at least equal to the RMD, the IRS could impose an excise tax equal to 50% of the required amount not distributed. Under SECURE 2.0 this excise tax is reduced to 25%. The excise tax can be reduced to 10% if the missed RMD is distributed and a return with payment of the 10% excise tax occurs during the new “Correction Period” created by SECURE 2.0.
The Correction Period begins on the date when the excise tax first applies (i.e., the last date on which the missed RMD was required to be made) and, for most taxpayers, will end on the last day of the second taxable year that begins after the end of the taxable year in which the RMD was required to be distributed. The Correction Period will end sooner, as follows: (i) immediately upon the date of mailing a notice of deficiency regarding the payment of the excise tax; or (ii) on the date the excise tax is assessed.
Note that Secure 2.0 did not repeal Code Section 4974(d), which permits individuals to request a waiver of the excise tax if the individual can establish that the failure to take the RMD or full RMD was due to reasonable error and reasonable steps are being taken to remedy the shortfall. Requests for waiver of the excise tax can be made using Form 5329.
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[1] If the participant is a 5% or greater owner RMDs are required to begin on the April 1st following the attainment of the applicable age. RMDs for IRA account holders are subject to the same rule.
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