The modifications to the Required Minimum Distribution (RMD) regulations for retirement accounts, including 401(k)s, traditional IRAs, SEP IRAs, and inherited Roth IRAs in 2024, have introduced noteworthy alterations. These adjustments, stemming from legislative shifts such as the SECURE Act and subsequent updates, have created an evolving landscape for retirement planning.
What’s New with RMDs in 2024?
Commencing January 1, 2024, the RMD obligations pertinent to 401(k) Roth accounts undergo exemption. Furthermore, employers will soon have the option to extend vested matching contributions to 401(k) Roth accounts for employees. However, the integration of these adjustments into plan provisions and payroll systems may necessitate a transitional phase. Historically, matching contributions in employer-sponsored plans were pre-tax, whereas contributions to Roth retirement plans occur post-tax, enabling tax-free growth of earnings.
While Roth IRAs typically do not mandate RMDs, this exemption won’t apply to Roth accounts within an employer-sponsored plan until 2024.
Updates to RMD Initiation Age Requirements
The recent modifications to RMD rules have reshaped certain key facets, including the adjustment of the starting age. The SECURE Act elevated the RMD initiation age from 70 ½ to 72, effective in 2020. Subsequently, the SECURE ACT 2.0, implemented in 2022, introduced further changes.
In the current context, the mandatory initiation age for RMDs has been raised again, requiring individuals to commence their RMDs at age 73, an extension from the previous 72. It’s important to note that deadlines remain unchanged; if an individual reaches 73 within the year, the RMD must be taken by April 1 of the following year. For those already undergoing RMDs, the established deadline continues to be December 31.
Additionally, the penalty for non-compliance with RMD regulations has been revised. Previously set at 50% of the shortfall between the actual withdrawal and the stipulated amount, the penalty has now decreased to 25% in 2023. This penalty further diminishes to a nominal 10% if the prescribed amount is withdrawn within a two-year window. For instance, a scenario that once incurred a $2,500 penalty could now reach a maximum of $1,250 or just $500 if rectified promptly under the revised regulations.
Exceptions to Required Minimum Distributions
Special considerations apply to Required Minimum Distributions concerning inherited retirement accounts. The SECURE Act altered the treatment of inherited IRAs, introducing distinct regulations for IRAs inherited before and after 2020, as well as for eligible designated beneficiaries (spouses and certain other individuals) versus non-eligible designated beneficiaries. Notably, eligible designated beneficiaries utilize their life expectancies for RMD calculations, while non-eligible designated beneficiaries are subject to the ten-year rule.
How to Ensure Compliance with RMD Regulations
Ensuring compliance with Required Minimum Distribution (RMD) rules and rectifying any potential errors demands a precise approach and adherence to IRS guidelines. Calculating RMDs accurately involves intricate considerations, particularly when managing multiple retirement accounts. Seeking assistance from a tax professional or financial advisor is highly recommended to navigate this process effectively. To get the process started, you can use an RMD calculator like this one from AARP.
In the event of an RMD oversight where insufficient funds were withdrawn, immediate action is crucial. Requesting the shortfall amount from your retirement accounts promptly is imperative to meet the annual minimum distribution requirement. Opting for a check from the plan custodian rather than an electronic fund transfer facilitates documentation for corrective measures. Retain a copy of the check for IRS submission purposes.
When rectifying an RMD mistake, drafting a concise yet comprehensive letter to the IRS explaining the circumstances and the corrective action taken is pivotal. Clearly outlining the situation, expressing a “reasonable cause” for the error, and affirming the fulfillment of the RMD, while detailing measures to prevent future occurrences, is essential. Demonstrating a good-faith effort to rectify the oversight promptly enhances the likelihood of the IRS granting leniency.
In instances where the error stems from factors beyond personal control, such as financial institution errors or severe illness, the IRS is inclined to consider such cases favorably, potentially waiving penalties.
About IRS Form 5329
Completing IRS Form 5329 accurately and attaching it to the yearly tax return is advisable if the discrepancy occurred within the same tax year. However, if the oversight spans multiple tax years, individual Form 5329 submissions for each respective year become necessary. Precise completion of the form, particularly Line 54 indicating “RC” for reasonable cause and the amount of the missed RMD, is crucial to avoid miscalculations leading to penalties.
Expect a significant processing period from the IRS after filing Form 5329, potentially several months. Monitoring any correspondence from the IRS is essential, especially when seeking penalty waivers, as proactive engagement can facilitate a smoother resolution.
Connect with a Professional
Remaining compliant with RMD regulations is paramount, despite reduced penalties and extended withdrawal timelines. Collaborating with a financial advisor to devise a comprehensive retirement plan not only safeguards against unexpected financial implications but also mitigates stress during tax periods and optimizes tax liabilities. Seeking professional guidance ensures a proactive approach to RMD compliance and financial planning tailored to individual retirement objectives. Consider initiating a consultation with an advisor to explore the benefits of a well-structured retirement plan.
About Davis Wealth Management
Davis Wealth Management is a pre-retirement and retirement planning and education organization that has grown to be a multi-fiduciary advisory company that provides an array of financial services. Our team is committed to empowering you with the tools to identify and achieve your financial goals and provide you with a more confident retirement. To get started on a more secure financial future, visit daviswealthmgmt.com or call (603) 715-2335.