RMD Rules Under the SECURE Act and SECURE 2.0

Overview of Required Minimum Distribution Rules

Required minimum distributions represent the government's mechanism for ensuring that tax-deferred retirement accounts eventually generate taxable income. Participants cannot defer distributions indefinitely; once RMDs begin, annual minimum amounts must be distributed and included in taxable income. The RMD rules apply to traditional IRAs, SEP IRAs, SIMPLE IRAs, 401(k) plans, 403(b) plans, 457 plans, and inherited retirement accounts, though Roth IRAs have different treatment.

The policy rationale for RMDs reflects the original purpose of retirement account tax incentives: encouraging retirement savings while ensuring the Treasury eventually collects tax revenue. By requiring distributions based on life expectancy, the rules balance continued tax deferral with gradual account liquidation over the participant's remaining lifetime. Understanding RMD rules is essential for retirement planning, tax optimization, and avoiding substantial penalties for noncompliance.

Recent legislative changes have significantly altered RMD requirements. The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 increased the RMD starting age from 70½ to 72, effective for individuals reaching 70½ after 2019. The SECURE 2.0 Act of 2022 further increased the starting age to 73 for individuals reaching 72 after 2022, and will increase it again to 75 for individuals reaching 74 after 2032. These changes provide additional tax deferral years for retirement savers.

RMD Starting Age: SECURE Act Transitions

Determining when RMDs must begin requires careful attention to the various effective dates and transition rules enacted through SECURE and SECURE 2.0 legislation.

Individuals who reached age 70½ before January 1, 2020, were subject to the pre-SECURE law requiring RMDs beginning at age 70½. This cohort was not affected by SECURE Act changes and had to begin distributions under the old rules.

Individuals who reach age 72 after December 31, 2019 but before January 1, 2023, must begin RMDs at age 72. This group benefited from the SECURE Act's increase from age 70½ but not from SECURE 2.0's further increase.

Individuals who reach age 72 in 2023 or later must begin RMDs at age 73. This group benefits from SECURE 2.0's additional deferral. The first year for which an RMD is required is the year the participant reaches age 73, though the distribution may be delayed until April 1 of the following year.

Individuals who reach age 74 in 2033 or later will begin RMDs at age 75. This future change provides yet another deferral year but does not affect current retirees.

The April 1 deadline for the first RMD creates a potential "double distribution" year. Participants may delay the first RMD until April 1 of the year following the year they reach the RMD starting age. However, the second RMD must be taken by December 31 of that same year, resulting in two distributions in one tax year. Practitioners should counsel clients on whether delaying the first RMD or taking it in the first year produces better tax results based on projected income.

Calculating Required Minimum Distributions

RMD calculations use a straightforward formula: divide the prior year-end account balance by the life expectancy factor from applicable IRS tables. The process appears simple but requires attention to detail and understanding of which tables apply in various circumstances.

The account balance used is the fair market value as of December 31 of the prior year. For example, the 2024 RMD is based on the December 31, 2023 account balance. Outstanding rollovers or transfers in progress on December 31 complicate the calculation and may require adding back amounts in transit. Practitioners should verify that year-end balances are accurate and reflect all contributions, distributions, gains, and losses.

The Uniform Lifetime Table applies for most participants. This table provides life expectancy factors based on the participant's age, assuming a beneficiary exactly 10 years younger than the participant. The table was updated in 2022 to reflect longer life expectancies, resulting in larger life expectancy factors and smaller RMDs compared to the old table. For 2024, a 73-year-old uses a factor of 26.5; a 75-year-old uses 24.6; an 80-year-old uses 20.2.

The Joint Life and Last Survivor Expectancy Table applies when the participant's sole beneficiary is a spouse more than 10 years younger. This table generally provides larger factors and smaller RMDs, recognizing the longer joint life expectancy. Qualification for this table requires that the spouse be the sole beneficiary for the entire year. If beneficiaries change during the year due to divorce or designation changes, the Uniform Lifetime Table applies.

The Single Life Expectancy Table applies to beneficiaries calculating RMDs from inherited accounts. This table provides shorter life expectancies and larger RMDs compared to the Uniform Lifetime Table. Inherited account RMD rules changed significantly under the SECURE Act and are covered in detail in a separate unit.

Aggregation and Separation Rules

Individuals with multiple retirement accounts must calculate RMDs separately for each account but may aggregate certain accounts for distribution purposes.

IRA aggregation allows individuals with multiple traditional IRAs to calculate RMDs separately for each IRA but take the total RMD from any one or more of the IRAs. For example, if separate RMDs of $5,000, $3,000, and $2,000 are calculated for three IRAs, the participant may take the entire $10,000 from one IRA or in any combination from the three. This flexibility allows selecting distribution sources strategically, perhaps depleting less desirable investments first.

403(b) aggregation similarly allows calculating RMDs separately for each 403(b) contract but taking the total from any one or more contracts. However, 403(b) accounts cannot be aggregated with IRAs; each account type must separately satisfy its RMD requirements.

No aggregation for 401(k), 457, or other plans requires taking RMDs separately from each employer plan. If a participant has three different 401(k) accounts from former employers, each account's RMD must be taken from that specific account. This lack of aggregation may force distributions from all accounts even when the participant would prefer to preserve some accounts.

Inherited IRAs are calculated and distributed separately from the beneficiary's own IRAs. Additionally, inherited IRAs from different decedents cannot be aggregated; each decedent's accounts must separately satisfy RMD requirements. However, multiple inherited IRAs from the same decedent may be aggregated.

Penalty for Missed RMDs

Failure to take the full RMD by the deadline triggers an excise tax penalty. Understanding this penalty and correction procedures is critical for practitioners assisting clients with retirement distributions.

The penalty historically equaled 50 percent of the shortfall—the amount not distributed that should have been. This severe penalty emphasized the importance of RMD compliance. However, SECURE 2.0 reduced the penalty to 25 percent, effective for missed RMDs in 2023 and later, recognizing that the 50 percent penalty was excessively harsh particularly for inadvertent errors.

Furthermore, if the shortfall is corrected during a "correction window," the penalty is further reduced to 10 percent. The correction window is the earlier of the date the IRS issues a notice of deficiency regarding the penalty, the date the excise tax is assessed, or the last day of the second taxable year beginning after the year for which the penalty applies. For practical purposes, this generally means that correcting within about two years reduces the penalty to 10 percent.

Calculating the penalty requires determining the shortfall: the required minimum distribution for the year minus the amount actually distributed. If no distribution occurred, the shortfall equals the full RMD. If partial distributions occurred, the shortfall is the difference. The penalty applies to the calendar year in which the RMD was due, not when it is discovered or corrected.

Reporting missed RMDs requires Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts. Part IX of this form addresses the excise tax on excess accumulation. The taxpayer reports the RMD shortfall and calculates the penalty. However, taxpayers seeking reasonable cause relief may attach a statement explaining the circumstances and requesting waiver.

Reasonable Cause Waiver

The IRS has authority to waive the RMD penalty if the shortfall was due to reasonable error and the taxpayer is taking reasonable steps to remedy the shortfall. In practice, the IRS liberally grants waivers for taxpayers who promptly correct missed RMDs and demonstrate the failure was inadvertent.

Establishing reasonable cause requires showing the failure resulted from circumstances beyond the taxpayer's control or reasonable error, not willful neglect. Common reasonable cause situations include reliance on incorrect advice from financial institutions, administrative errors by custodians, reasonable misunderstanding of complex RMD rules, illness or incapacity preventing attention to financial matters, and simple oversight with prompt correction once discovered.

The correction process involves taking the missed distribution plus any subsequent missed RMDs, filing Form 5329 for each year with shortfalls, requesting waiver by attaching a statement explaining the reasonable cause, and maintaining documentation of the correction and circumstances. The IRS typically grants waivers when taxpayers act in good faith to correct errors promptly.

Special Situations and Exceptions

Several special circumstances affect RMD requirements and provide planning opportunities.

Still-working exception allows participants in employer plans (not IRAs) to delay RMDs until retirement if they continue working past the RMD starting age and are not 5-percent owners. This exception applies only to the plan of the current employer; RMDs from former employers' plans and from IRAs must still begin at the normal starting age. The still-working exception provides valuable tax deferral for individuals with continued employment.

Qualified charitable distributions (QCDs) allow taxpayers age 70½ or older to direct up to $100,000 annually from IRAs to qualified charities. QCDs satisfy RMD requirements without generating taxable income, providing tax-efficient charitable giving. QCD planning is covered in detail in a separate unit.

Qualified Longevity Annuity Contracts (QLACs) allow excluding up to $200,000 (indexed for inflation after 2023) or 25 percent of account balance in a QLAC from RMD calculations until age 85. This exclusion reduces annual RMDs during ages 73-84, concentrating distributions later when life expectancy is shorter. QLAC planning requires careful evaluation of trade-offs between tax deferral and lifetime income needs.

Planning Strategies to Minimize RMD Impact

For clients who do not need retirement account distributions for living expenses, RMDs may create unwanted tax liability. Several strategies can minimize RMD impact.

Roth conversions before RMD age eliminate future RMDs on converted amounts since Roth IRAs are not subject to lifetime RMDs. Strategic conversions during low-income years or gradually over multiple years may reduce lifetime tax liability even though conversions accelerate income recognition. Practitioners should model conversion scenarios considering current and projected future tax rates, RMD amounts, and longevity assumptions.

Qualified charitable distributions provide tax-free charitable giving while satisfying RMDs. For charitably inclined clients, QCDs may be more beneficial than taking RMDs, paying tax, and then making charitable contributions, particularly after the increased standard deduction makes itemizing less common.

Asset location strategies place high-growth investments in Roth accounts (not subject to RMDs) and lower-growth investments in traditional accounts subject to RMDs. This strategy minimizes RMDs while maximizing Roth account growth that avoids taxation.

In-plan Roth conversions convert traditional 401(k) or 403(b) balances to Roth accounts within the same plan. While this generates current taxable income, it eliminates future RMDs from the converted amounts. Not all plans offer this feature, but when available, it provides an alternative to IRA conversions.

Bunching taxable income in specific years may allow taking larger distributions before RMD age begins, depleting traditional accounts more quickly and reducing future RMDs. This strategy works when clients have flexibility in income recognition timing and can benefit from filling lower tax brackets.

Coordination with Social Security and Medicare

RMDs affect not only income tax but also Social Security taxation and Medicare premiums through income-driven adjustments.

Social Security taxation increases when RMDs push modified adjusted gross income above thresholds for taxability. Up to 85 percent of Social Security benefits become taxable when income exceeds certain levels. RMDs that push clients into higher taxation ranges effectively increase marginal rates. Planning distributions to manage income relative to these thresholds reduces overall tax burden.

Medicare IRMAA (Income-Related Monthly Adjustment Amount) increases Medicare Part B and D premiums for beneficiaries with modified adjusted gross income above certain thresholds. IRMAA determination uses tax information from two years prior; 2024 premiums are based on 2022 income. Large RMDs may trigger IRMAA surcharges two years later. Strategic distribution planning, including spreading distributions over multiple years or using QCDs, may avoid or reduce IRMAA.

Documentation and Compliance

Maintaining adequate documentation of RMD calculations, distributions, and any corrections ensures compliance and facilitates tax reporting.

Custodians generally provide RMD notices and calculations, but participants remain responsible for ensuring distributions occur. Practitioners should not rely solely on custodian calculations without verification. Independent calculation confirms custodian accuracy and ensures understanding of RMD amounts.

Distribution records including Forms 1099-R should be retained as substantiation. These forms document that distributions occurred and were properly reported. When RMDs are satisfied through aggregation of multiple accounts, documentation showing how distributions from various accounts sum to satisfy total RMDs supports compliance.

Correction documentation for missed RMDs should include records of corrective distributions, Form 5329 filings, reasonable cause statements, and correspondence with IRS regarding waivers. This documentation proves compliance efforts if questions arise later.

Understanding RMD rules as modified by SECURE and SECURE 2.0 legislation is essential for effective retirement planning. The gradual increase in starting ages provides additional tax deferral opportunities, while reduced penalties for errors acknowledge the complexity of these rules. Practitioners who master RMD calculations, aggregation rules, penalty provisions, and planning strategies provide valuable guidance helping clients navigate these complex requirements while minimizing tax liability.