Do You Need to Take a Required Minimum Distribution by April 1, 2023?
With the recent enactment of The Setting Every Community Up for Retirement Enhancement (SECURE) 2.0 Act (the Act), we have been getting a lot of questions relating to required minimum distribution (RMD) requirements and the changes that were made to RMD’s with the SECURE 2.0 Act.
With significant penalties in place for non-compliance with the RMD rules, you will certainly want to make sure you take your 2022 RMD by April 1, 2023, if necessary.
Before the Act, RMD rules were in place that would require a withdrawal from a traditional IRA, SEP IRA, SIMPLE IRA and other retirement plan accounts, when the account owner reaches age 72.
The Act modified the “applicable age” for determining RMDs, as follows:
- The applicable age increases to 73 for individuals starting on January 1, 2023 (only for those that attain age 72 after December 31, 2022).
- The applicable age increases to 75 for individuals starting on January 1, 2033 (only for those that attain age 74 after December 31, 2032).
For income tax purposes, the 2022 RMD taken between January 1, 2023, and April 1, 2023, will be subject to income taxes for the 2023 tax year. In addition, the individual would also have a 2023 RMD requirement, which must be taken by December 31, 2023, and will also be subject to income tax in 2023.
Delayed RMD Exception
There is an exception to certain RMD rules for some taxpayers that continue to work for the employer that sponsored the retirement plan. Applying only to these employer-sponsored retirement plans, the RMD requirement is waived if the taxpayer continues to work for the employer, even after the applicable age is met during the tax year.
However, this rule does not apply to non-employer-sponsored plans (for example, an IRA), and it does not apply if the taxpayer is a 5 percent or greater owner of the business sponsoring the retirement plan.
Prior to the enactment of the Act, RMDs were required for Roth accounts in an employer-sponsored retirement plan (for example, a Roth 401(k) plan). Taxpayers are exempt from RMDs from Roth IRA accounts, which have no RMD requirement until after the death of the Roth IRA owner.
Beginning in 2024, the Act eliminated the RMD requirement for the Roth accounts held in employer-sponsored retirement plans. As a result, RMD will be required for Roth accounts in employer plans (for example, a Roth 401(k) plan) in 2022 and 2023, but the requirement is eliminated starting in 2024. The Act made no change to the RMD rules relating to Roth IRA accounts; therefore, no RMD is required until after the death of the Roth IRA account owner.
Excise Tax (Penalty) – Failure to Take RMD
There is an excise tax (a penalty) applied to taxpayers for not meeting the RMD rules. Before the enactment of the Act, the excise tax penalty under Internal Revenue Code Section 4974 was 50 percent of the RMD amount which was not withdrawn during the applicable period.
Starting with the 2023 tax year, the SECURE 2.0 Act reduced the Section 4974 excise tax penalty on the failure to take RMDs from 50 percent down to 25 percent. In addition, the Act added provisions that allow for a correction of a failure to take the RMD. If the RMD failure is corrected promptly, the excise tax penalty is reduced from 25 percent to 10 percent.
The Act made significant changes to retirement plans and required minimum distribution requirements. With significant excise tax penalties applying for the failure to meet RMD requirements, if you attained age 72 during 2022 and became subject to a RMD requirement, you still have until April 1, 2023, to ensure you have met your RMD requirement for 2022.
If you have any questions about these RMD rules or any of the other provisions contained within the Act, please contact Dannible & McKee, LLP for additional information.
Contributing author: Brian J. Potter, CPA, CDA, is a tax partner at Dannible & McKee, LLP. Brian has over 17 years of experience providing tax and consulting services to a wide range of clients. He has extensive experience in individual and corporate tax planning, financial planning, multi-state taxation, research and development tax credits, New York State income tax credits and ownership transition advisory.