What SECURE 2.0 Means for RMDs

The SECURE Act 2.0, enacted at the end of 2022, significantly changes the rules governing required minimum distributions (RMDs) for owners of traditional IRAs and Roth 401(k) accounts. Here's what you need to know.

First, the age at which owners of traditional IRAs must start taking RMDs is increasing. The original SECURE Act, enacted in 2019, raised the long-standing age at which required minimum distributions must begin from age 70½ to age 72; SECURE Act 2.0 increases the RMD age for those born between 1951-1959 to age 73 and those born in 1960 or later to age 75.

The SECURE Act 2.0 also reduces the penalty for not taking an RMD. Previously, the penalty was 50% of the amount that should have been distributed but wasn't. The new law reduces this to 25%, with the possibility of further reducing it to 10% if the IRA owner satisfies the missed RMD in a timely manner. This penalty reduction applies to all people who must take RMDs, including those who had to begin RMDs at earlier ages under the old rules.

The IRS has been lenient in the past in waiving the 50% penalty if a distribution was eventually made and reasonable cause was offered for the delay. While the IRS can still waive the lower penalty, it's unclear whether they will be as lenient now that it is lower than 50%.

Additionally, the SECURE Act 2.0 eliminates the RMD obligation for original owners of Roth 401(k) accounts. Previously, Roth 401(k) account owners had to take RMDs just like traditional 401(k) account owners, but now they are exempt from this requirement. This change, however, doesn't take effect until 2024.

It's important to note that the RMD rules remain the same for beneficiaries who inherit traditional and Roth IRAs. Most non-spousal beneficiaries must still follow the 10-year rule created in the original SECURE Act unless they qualify as an eligible designated beneficiary

Finally, the SECURE Act 2.0 also reduces the statute of limitations on the RMD penalty. Previously, the three-year statute of limitations on the RMD penalty started running when the IRA owner filed Form 5329. Under the new law, the statute of limitations begins running when Form 1040 is filed for the year the RMD was supposed to be taken, even if Form 5329 isn't included with Form 1040.

In conclusion, the SECURE Act 2.0 brings several significant changes to the rules governing RMDs. The age at which traditional IRA owners must start taking RMDs is gradually increasing to age 75, while the penalty for not taking an RMD has been reduced from 50% to 25%, and if timely corrected, to as low as 10%. Original owners of Roth 401(k) accounts will no longer have to take RMDs starting in 2024, and the statute of limitations on the RMD penalty has been reduced. It's essential to stay informed of these changes to ensure compliance with the law and avoid unnecessary penalties.