As a retiree, or someone about to retire, having to cancel a subscription can be a source of stress – and complicated changes in recent years have led to more confusion among savers.
Americans must start taking these annual withdrawals — known as required minimum distributions (RMDs) — at a certain age or risk a penalty.
Before 2020, Americans had to start withdrawing money at age 70.5 – before the Secure Act of 2019 raised the age to 72. Then, in December 2022, Congress passed the Secure 2.0 Act, which went into effect this year, and raised the age. again up to 73.
“RMDs are already an obscure factor in traditional retirement that people are underinformed about,” investment advisor Patrick Donnelly told DailyMail.com.
“Additionally, adding a layer of RMD-era complexity that changes incrementally over a short period of time has left people confused about their personal RMD obligations.”
Investment advisor Patrick Donnelly said many Americans are confused by the changes to their individual RMD obligations
For 2023, RMDs apply to both pretax and Roth 401(K) accounts and most individual retirement accounts (IRAs). The mandatory withdrawals do not apply to Roth IRAs until the death of the account owner.
The Internal Revenue Service (IRS) sets a minimum amount that Americans must withdraw from their accounts each year, based on their life expectancy and the amount they have saved.
The penalties for making a mistake and withdrawing too little or too late are punitive: 25 percent of the unwithdrawn amount.
Before the new law was introduced, the fine was as much as 50 percent.
Donnelly of Donnelly Financial Services said, “Someone who has a traditional IRA balance of $1 million and is 73 years old as of December 31 of this year would have an RMD of $37,735.85.
“If they do not withdraw from the IRA by April 1, 2024, they face a $9,434 fine.”
However, if someone corrects the mistake within two years, the penalty can be reduced to 10 percent, according to the IRS.
By completing this form you can request a waiver of the fine from the Tax Authorities Form 5329 and a letter of explanation attached, said IRA expert and certified public accountant Ed Slott CNBC. But there’s no guarantee the IRS will agree to waive the fee, he said.
Cutting through all the fog, the most important change retirees need to be aware of is the increase in age, experts say.
Americans must get their first RMD by April 1 of the year following the year in which they turn 73.
People who turn 72 in 2023 can defer RMDs until they turn 73.
But those who turned 72 in 2022 should have taken their 2022 RMD by April 1 this year, and their 2023 RMD by the end of the year.
For a first RMD, the deadline is April 1 – and then it’s December 31 of the current year for future withdrawals.
Americans must start taking annual withdrawals — known as required minimum distributions (RMDs) — at a certain age or risk a penalty
“If people aren’t prepared for it for the first time, they often take two RMDs the first year,” Donnelly said.
“The first from the previous year before April 1, and the next in the same year for their current tax return.”
In other words, anyone born in 1950 or earlier will be required to take an RMD in 2023, and anyone born in 1951 or later will not be required to do so.
“People who are still working on a business plan can postpone it until they retire,” Slott told CNBC. But this expansion does not apply to IRAs.
The RMD rules for inherited IRAs are even more complicated and depend on details such as when the original owner died and the type of beneficiary.
The confusion surrounding these rules has prompted the IRS to waive penalties for some heirs who have missed deadlines for accounts inherited in recent years.
Donnelly says there are “two sides of the coin” when it comes to the implications of RMD rule changes under the Secure 2.0 Act.
“Before those RMDs kick in, you now have an extra year – maybe two – to do proactive tax planning,” he said.
‘The other side of the coin now is the RMD age, if you haven’t done that proactive tax planning and you’re not sufficiently informed about RMDs and their tax implications, you’re forced to take more because you’re older.
“It presents opportunities, but also challenges for those who are insufficiently informed and have not made plans,” he added.
Under the right circumstances, Donnelly says retirees might consider converting a Roth 401(K) into a simple self-created Roth IRA — which doesn’t require RMDs.
Starting in 2024, the new rules mean that investors in Roth 401(K) accounts will no longer have to accept RMDs.