How the SECURE Act 2.0 changed RMDs

At the end of 2022, Congress passed a law pertaining to retirement accounts, such as 401(k)s, that affects all investors. The SECURE Act 2.0 was designed to make it easier for you to save for retirement and access your retirement savings.

The law includes several key provisions involving required minimum distributions (RMDs) that anyone who's saving for retirement should understand. Here are four key details to keep in mind.

The first version of the SECURE Act, which was passed in 2019, increased the age at which individuals must begin taking required minimum distributions to age 72. The SECURE 2.0 changed the age requirements again.

The age at which you must start to take RMDs now uses a sliding scale, depending on your year of birth:

• If you were born in 1950 or earlier, your RMD age is 72.
• If you were born between 1951 and 1959, your RMD age is 73.
• If you were born in 1960 or after, your RMD age is 75.

The SECURE Act 2.0 made these changes in response to longer life expectancies and later retirement dates.

While retirement accounts provide a lot of benefits, you can end up paying costly IRS penalties if you don't withdraw the correct amount for your RMD or if you don't do it by the taxable year's deadline.

SECURE 2.0 reduced the potential penalty for failure to take your RMD from 50% to 25%. If you make a mistake but correct it within the correction window, the penalty shrinks to just 10%. The correction window begins on the date the tax is imposed and ends at the earliest of: when the Notice of Deficiency is mailed to the taxpayer, when the tax is assessed by the IRS, or the last day of the second tax year after the tax is imposed.

A big update brought on by the SECURE Act 2.0 impacted RMDs for Roth employer retirement plans, such as Roth 401(k)s and Roth 403(b)s. Now, owners of these accounts no longer have to take RMDs.

This adjustment puts this type of account on the same track as Roth IRAs. Previously, many people opted to roll funds from their employer-funded account to a Roth IRA to avoid having to take RMDs. Now, you can keep your funds in your employer-funded Roth 401(k) without facing RMDs, which could be to your advantage if you don't need to withdraw it for living expenses and would like to continue to experience tax-free growth of the assets.

The rules around RMDs for inherited IRAs also changed with the SECURE Act 2.0. The law previously allowed a surviving spouse who inherits a retirement account to roll the IRA into their own, to elect to handle the decedent's IRA as if it were their own, or to remain a beneficiary of the IRA. It also provided that surviving spouses could delay RMDs until the deceased spouse would have reached the RMD age.

The new law now provides surviving spouses the option to calculate RMDs using the Uniform Lifetime Table instead of the Single Lifetime Table—essentially calculating RMDs as if they were the owner of the account, not the surviving spouse. In addition, a surviving spouse's beneficiaries can be treated as if they were the original beneficiaries of the account if the surviving spouse passes away before RMDs begin.

The SECURE Act 2.0 brought many changes to retirement accounts. It could be helpful to review all the updates with a qualified professional, who can offer personalized insights and answer your unique questions. Reach out to a local financial advisor to discuss these changes and how they may impact your retirement plans.