Here are the IRA rules in a nutshell: save and then withdraw.
Let’s do a shallow dive into the specifics.
We spend all of our working years scrimping and saving so when that magic day comes, we can start spending on our retirement. Your friendly federal government encourages this by deferring taxes on our saved money, as long as we follow the rules and have it in a recognized retirement account.
But your government has only so much patience. Part of the deal is that it will force you to eventually start withdrawing your retirement funds and paying the associated taxes. The amount that you must withdraw is called your required minimum distribution, or RMD. Originally, you had to start withdrawing money when you reached age 71 ½. And when you died, then your beneficiaries also got favorable treatment by stretching out their forced withdrawals on their inherited account.
The SECURE Act and the SECURE 2.0 Act
Then the government started tinkering. It passed the SECURE Act in 2019, followed by the SECURE 2.0 Act of 2022. The IRS chimed in with clarifying regulations, most recently on July 18, 2024. More regulations have been proposed.
After all the changes, the mandatory age for starting withdrawals is age 73. However, this differs depending upon the type of retirement account.
73 is the magic age for withdrawals from your traditional IRA, SIMPLE IRA, SEP IRA, or retirement plan accounts (if you reached age 72 before Dec. 31, 2022, then the cutoff was age 72).
73 is also the magic age for withdrawals from your 401(k), profit-sharing, 403(b), or other defined contribution plan, with 1 big caveat: if the retirement plan allows it, then you can delay withdrawals until you retire, provided you do not own 5% or more the business.
The best of all worlds, however, is your Roth IRA. You are not required to withdraw money from your Roth IRA during your lifetime.
Required Minimum Distributions (RMD)
For RMDs, timing is everything. Generally, your first RMD is due on April 1st of the year after you hit the target age. Your 2nd RMD is due on December 31st of the same year.
For those straddling the required distribution age change from 72 to 73 (brought about by changes found in the SECURE 2.0 Act), there is a grace period. If you reached age 72 in 2023, you must take your first RMD by April 1, 2025. This first distribution covers your required 2024 distribution. There is no RMD for 2023.
How Your Retirement Plan Can Affect Your Beneficiaries
We all know that a retirement plan has two parts: your life and after your death. The first part – during your lifetime – covers when you have to take RMDs. The second part is when your beneficiaries have to take RMDs after you die.
If your beneficiary is your spouse, then your spouse can elect to take a spousal rollover of your account. The time for taking withdrawals is stretched out.
For most other individual beneficiaries, SECURE Act and SECURE 2.0 Act wrought woeful changes. If you were in an RMD status when you died, then your beneficiaries must withdraw the entire account within a 10- year period. The final rules apply for distribution calendar years beginning on or after January 1, 2025. In recognition of the uncertainty surrounding withdrawals before final rules were issued, there is no penalty and no requirement to make up for missed RMDs for the years 2021-2024.
Hammerle Finley Can Help With Your Retirement Planning
The law in this area is complex, and the penalties are onerous. Rely on the experts to figure this out for you. Our team of expert attorneys are here to help with your estate planning needs. Schedule a consultation today.
Virginia Hammerle is an accredited estate planner and represents clients in estate planning, probate, guardianship, and contested litigation. She may be reached at legaltalktexas@hammerle.com. This blog contains general information only and does not constitute legal advice.
