RMD changes for 2023

Just when we feel like we know the rules, they change, right? Such is life. Thanks to the passage of the SECURE 2.0 Act of 2022, signed into law one of the last days of December, we have another change or two to frustrate the computer programming folks at financial services companies.

First a reminder: A required minimum distribution ( RMD) is a mandated annual withdrawal from a retirement account such as an IRA, 401( k), 457 or 403) b) plans ( plus others). It's the minimum amount you must withdraw after reaching a certain age in order to comply with federal tax laws. And no, it doesn't matter if you need that money or not. The layman's terms I typically use are this: You've never paid taxes on dollars within pre- tax retirement accounts, and Uncle Sam says, “That's enough. I want mine.” So when you take your RMD, it is generally taxed as ordinary income. He gets his.

There are a few exceptions, but for the vast majority of those with money in pre-tax accounts, these withdrawals must now start the year we turn 73. That's up from 72 in 2022 and 70½ prior to that. (If you turned 72 last year, you do still have to take your RMD in 2023; however, if you are turning 72 in 2023, you can now wait until 2024 for your first RMD.) Roth IRAs, which are funded with after-tax money, represent a common exception to distribution rules. There are no required minimum distributions with these accounts, meaning the money can be left in the Roth IRA by the original owner for their entire lifetime if desired. (There is an exception to this rule, however, if you are not the original owner of the Roth IRA. In cases where you inherited the Roth IRA from someone else, there are distribution requirements to be met.)

To avoid costly mistakes, such as withdrawing the wrong amount or forgetting to take a distribution altogether, it's a good idea to make a long- term plan that maps out your retirement distribution schedule. ( And keep in mind that if you're already taking RMDs, the new law doesn't impact you.)

Mistakes to avoid with required minimum distributions:

1. Delaying your first RMD

Generally, you're required to take RMDs by December 31 each year. However, for the first year after you turn 73 and are retired, you have until April 1 of the subsequent year to take your initial distribution. Keep in mind, though, that if you take advantage of that extended deadline, you will then have to take two distributions within a 12- month timeframe. This is because you'll still need to take your next annual minimum distribution by December 31 of that year.

Taking two RMDs in one year can impact your annual income as the distributions are taxed as ordinary income. Too much income in one year from retirement accounts can potentially put you into a higher tax bracket.

2. Forgetting to take your RMD

Another common mistake is simply forgetting to take your RMD. The IRS assesses a 25-percent penalty on the RMD amount if you don't take it by the annual deadline. (NOTE: That is a change, down from the previous 50-percent penalty assessed prior to passing of SECURE Act 2.0.) That penalty is assessed in the following tax year which can potentially bump you into another tax bracket for that year, thereby double-penalizing you. Most financial institutions do track this for you and give you the option to set up automatic RMD withdrawals each year, but the responsibility still falls on you, the taxpayer.

3. Mixing plan types to meet RMDs

For those who have multiple types of retirement accounts, it's important to understand the rules regarding annual distributions for each individual account. Bottom line on this is that you cannot use one TYPE of account ( say an IRA) to meet the RMD requirement on another TYPE of account ( say a 401( k)). Each account type carries its own RMD requirement. However, you can combine two IRA requirements and pull the funds from just one of those IRAs to meet the total RMD requirement in both IRAs combined.

Understand that a similar combining of old employer plans (401(k), 403(b), etc.) is NOT allowed. For these old employer plans, each carries its own RMD withdrawal requirement.

4. Combining RMDs with your spouse

While there are a host of financial benefits to consider as part of a marriage, retirement accounts must be held individually. They are not joint assets. And that reality impacts how RMDs are handled. Often, couples assume they can take the entire annual required distribution out of one spouse's account. But that is not the case.

5. Withdrawing the wrong amount

It is important to calculate your RMDs correctly. Withdrawing less than your RMD, for instance, may result in a tax penalty of up to 25% of the amount you were required to withdraw. There are RMD calculators available online that can help you sort through the complicated task of determining the