After decades of depositing portions of your hard-earned paychecks into retirement accounts, when you reach post-retirement age by celebrating birthdays in your 70s, the Federal government requires you to withdraw a minimum amount of money from these accounts annually. 

This practice is referred to as a Required Minimum Distribution (RMD). 

It can be confusing for individuals who spent their whole career having money put away in order to receive tax benefits and provide a financial cushion for the future to now, in their 70s, find themselves in a position where they are required to withdraw taxable funds from these accounts. 

Our retirement tax planning accountants at Steward Ingram & Cooper, PLLC are here to help you understand the ins and outs of RMDs and present you with the recent changes to the RMD Secure 2.0 Act that will affect your tax filing. If you are a senior citizen trying to understand how to calculate your RMDs or if you are helping an elderly loved one figure out how to document their required minimum distributions when filing their tax returns, our accounting firm is here to help. 

What Is a Required Minimum Distribution (RMD)?

A Required Minimum Distribution (RMD) is the amount of money you are required to withdraw from your qualified retirement plan accounts to comply with federal tax rules. Once a participant reaches their Required Beginning Date, they must withdraw a certain amount from their employer-sponsored retirement plans or their individual IRAs annually. 

What are Qualified Retirement Plans? 

  • Traditional IRAs. 
  • SEP IRAs for self-employed individuals or small business owners. 
  • SIMPLE IRAs for small business owners who provide employee match contributions. 
  • 401(k)s from employee-provided retirement plans.
  • 403(b)s from employee-provided retirement plans for teachers, employees of tax-exempt charities, ministries, and other tax-sheltered annuity plans. 
  • 457s for government workers.
  • Thrift Savings Plans (TSP). 

What is the RMD Required Beginning Date? 

Up until now, the required age to begin withdrawing RMD funds was 72. 

Per the updates made to the Secure 2.0 Act in 2022, the law was adjusted to require retirement fund withdrawals to begin at age 73, which became effective in 2023. 

Looking forward to the year 2033, the required beginning date will increase to age 75 per the new rules of the law. 

How Do I Know When to Begin Taking RMDs? 

If you are over the age of 72 and no longer working, you should have already taken out RMDs from your IRA or employer-sponsored retirement accounts. 

If you turned the age of 72 in 2022, your first RMD must be taken no later than April 1, 2023, with a second withdrawal taken by the end of 2023. 

If you turn 72 in 2023, you will not be required to take an RMD until you turn 73 in the year 2024. 

How is RMD Calculated? 

The IRS calculates required minimum distributions by taking the total sum of your tax-deferred retirement accounts and dividing that amount by numbers such as your life expectancy age and other factors. Based on their annual RMD calculations, individuals’ distributions get larger as they get older. 

If you need help calculating your RMD amounts, contact a Raleigh accountant who is experienced in working with retirement-aged individuals’ financial planning. 

What is the Secure 2.0 Act? 

In 2019 the Secure Act was passed by Congress, making an immediate impact on the amount of money and age requirements for RMDs. In 2022, President Biden signed the Secure Act 2.0 into law. These continued changes still affect the way retirement savings, tax planning, and financial planning impact older people in the U.S. 

What Changes to the Secure 2.0 Act Take Effect in 2023 and Beyond? 

While some changes to the Secure Act took immediate effect in 2023, other changes will not take effect for a few years. 

Here are the significant changes made to the legislation that affect how you plan for retirement: 

Raising the Starting Age

As mentioned above, the age requirements changed to become effective at age 73 but will rise again in 2033 to age 75. 

Increase in Catch-up Contributions

If you are over the age of 50, you were previously allowed to contribute up to $6,500 annually in addition to your standard contributions, but the 2023 changes to the act have raised that annual amount to $7,500. Beginning in 2025, anyone ages 60-62 can contribute an additional $10,000 to their accounts. 

Auto-enrollment for 401(k) Plans

Beginning in 2025 full-time employers will be required to automatically enroll employees into 401(k) plans, with individuals having the option to opt out by notifying employers. 

401(k) Eligibility for Part-time Employees

Part-time employees will become eligible to enroll in employer-provided 401(k) plans beginning in 2025, as long as they have worked a minimum of 500 hours over the course of 2 years with the company. 

Student Loan Debt Contributions

Beginning in 2024, employers can make contributions to workplace savings plans on behalf of employees who are still paying student loan debt. Employers can match contributions to a retirement fund for the employee in the same amount the employee paid in student loans. 

509 Savings Plans Will Roll Over into Roth IRAs

In 2024, individuals with money left in their 509 education savings funds can roll over up to a maximum of $35,000 to a Roth IRA retirement account. 

Roth Employer Plans

Since 2023, employees have had the option to have employer-matched contributions directed to their Roth 401(k)s. This is considered taxable income. 

Penalty-Free Withdrawals

Currently, individuals who withdraw funds from their retirement accounts early receive a 10% penalty. Under the new law, there are exceptions for individuals in extreme circumstances to not incur those penalties. If someone is terminally ill, has another qualifying health condition, or is escaping a domestic violence situation, they will not be met with a penalty fee for withdrawals. 

How to Make Smart RMD Decisions

In order to better prepare for your financial future, there are a few strategies you can use to lessen the tax burdens. 

  • Delay retirement and keep working. 
  • Convert to a Roth IRA. 
  • Limit your first-year distributions. 
  • Donate distributions to a qualified charity. 
  • Contact a CPA to help you prepare for your retirement and decisions regarding your RMDs. 

Work with Steward Ingram & Cooper, PLLC on Your RDMs

If you are in your 70s and not sure how to begin the process of withdrawing from your Required Minimum Distribution accounts or past the age of 72 and worried that you’ve already missed your first RMD withdrawal date our CPAs at Steward Ingram & Cooper, PLLC can help. 

Our accountants regularly work with retirement-aged clients for financial planning, tax consulting, and more and can work with you to answer your questions about RMDs and help lessen your tax burden. 

To learn more, call us today at  (919) 872-0866 or fill out our contact form below.

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