Video Killed the Radio Star… and RMDs Changed Too

by Lyn Domenick

If you remember that title song then you might remember a time before RMDs. Required minimum distributions (RMDs) have been a fixture of retirement plan operations ever since passage of the Tax Reform Act of 1986. One of the provisions in that law was the implementation of the RMD age starting with age 70-1/2; this partially offset lost revenue from the tax cuts in the bill. Many years later SECURE 1.0 increased the RMD age to 72 effective January 1, 2020. SECURE 2.0 increased the RMD age yet again and enacted other RMD-related changes that impact plan operations as described below.

• SECURE 2.0 increased the RMD age from 72 to 73 beginning January 1, 2023.  Participants who attained age 72 prior to January 1, 2023 were still required to begin RMDs no later than April 1, 2023. But if a participant attains age 72 after December 31, 2022, the RMD age will be 73. Then in 2033 the age jumps up again, and participants who attain age 73 after December 31, 2032 will have an RMD age of 75. There has been discussion of an IRS drafting error in SECURE 2.0 related to the precise time when age 75 kicks in. It is widely anticipated that the IRS will correct their drafting typo to clarify that 2033 is the correct year for the increase to age 75.
• Generally effective in 2024, Roth accounts in qualified plans will no longer be subject to RMDs. This aligns the tax treatment of Roth accounts in qualified plans with the tax treatment of Roth IRAs. Thus, a participant’s account with both pre-tax and Roth money will be subject to RMDs only from the pre-tax portion and not from the Roth portion. Recordkeepers are working to update their systems, procedures, and communications accordingly.
• Effective with tax year 2023, excise taxes levied on participants for failure to take timely RMDs have been reduced from 50% to 25%, and further reduced to 10% if the failure is corrected quickly after discovery of the problem. The most common reason for missed RMDs from qualified plans is lack of good contact information for terminated and retired participants. This is a good time to remind sponsors that they should have an ongoing process for locating missing participants and ensuring plan records are up to date. You can find our previous blog about best practices for searching for missing participants here. Note that reduced penalties do not necessarily mean reduced IRS scrutiny. Try to stay ahead of the problem by maintaining good plan records and timely distribution of RMDs.