When you hold a tax-favored retirement account, like a traditional IRA, you'll face the federal income tax required minimum distribution (RMD) rules once you reach a specific age. Similarly, if you inherit such an account, whether traditional or Roth IRA, these rules apply to you as well.
Here's what you need to know:
Withdrawals: You must take annual withdrawals from your accounts and pay the resulting income tax. Additionally, you might need to reduce the balance in your inherited Roth IRA sooner than expected.
The latest updates following recent tax-law adjustments:
RMD Basics:
RMD rules mandate annual withdrawals from tax-favored accounts, typically resulting in a federal income tax liability (and potentially a state tax liability) unless they meet the criteria for tax-free Roth IRA distributions. There's an exception for original Roth IRA account owners during their lifetime, but inherited Roth IRAs are subject to RMD rules.
Change in Starting Age:
With the enactment of SECURE 2.0 in 2022, the starting age for RMDs was raised to 73 for account owners who turn 72 between 2023 and 2032. This means if you reached 72 in 2023, your initial RMD for calendar year 2024 must be taken by April 1, 2025, to avoid penalties.
Reduced Penalty:
SECURE 2.0 also reduced the penalty for not withdrawing at least the RMD amount for the year from 50% to 25%, or 10% if the shortfall is withdrawn within a correction window.
Controversial 10-Year Liquidation Rule:
The original SECURE Act introduced a 10-year liquidation rule for most non-spouse IRA and retirement plan account beneficiaries after the account owner's death. However, the IRS's interpretation regarding annual RMDs during this period is debated. Notice 2023-54 stated that beneficiaries subject to the 10-year rule who didn't take RMDs in 2023 wouldn't face penalties. Additionally, new final RMD regulations are expected to be issued in 2024 or later.
Stay Informed:
While SECURE 2.0 brings positive changes to RMDs, the 10-year account liquidation rule remains uncertain. Keep an eye out for updates as developments unfold.
Contact Us:
Feel free to reach out by scheduling a meeting with your VAAS Tax Consultant. We look forward to working with you.