Understanding the Nuances of Retirement Withdrawals in 2023
Navigating the labyrinth of retirement plan withdrawals has become increasingly complex, with recent legislative changes introducing new layers of rules that can easily lead to errors, according to financial specialists.
Traditionally, retirees are required to initiate annual withdrawals, known as required minimum distributions (RMDs), at a designated age. This age threshold has seen changes: it was 70½ before 2020, adjusted to 72 with the Secure Act of 2019, and most recently, the Secure 2.0 Act of 2022 has escalated the age to 73, effective from 2023.
The intricacies of RMDs for inherited individual retirement accounts (IRAs) are particularly convoluted, leading the IRS to forgo penalties for missed RMDs in the last few years due to the confusion. “They’re complex,” comments Dwayne Kerr, an IRA specialist and certified public accountant. “Deciphering these rules shouldn’t be as difficult as it is.”
For the year 2023, RMDs are required for both traditional and Roth 401(k) accounts, as well as other employer-sponsored plans. This also includes most IRAs, although Roth IRAs are exempt from RMDs during the owner’s lifetime.
Failure to take the appropriate RMD or withdrawing an insufficient amount incurs a steep 25% penalty on the shortfall. However, this penalty can be reduced to 10% if the mistake is rectified ‘timely’ within a two-year window, as per IRS guidelines.
To potentially waive this penalty, retirees can submit Form 5329 with a detailed explanation to the IRS, although waiver approval is not guaranteed.
Who Needs to Take an RMD?
The most critical update for retirees regarding RMDs is the age increment. Secure 2.0 has advanced the starting age for RMDs to 73 from 72 for owners of traditional IRAs and participants in retirement plans. The first RMD must be taken by April 1 of the year after reaching age 73.
If you reach age 72 in 2023, you’re allowed to postpone RMDs until you’re 73. However, for those who turned 72 in 2022, the first RMD was due by April 1, 2023, with subsequent RMDs needed by the end of each year.
To simplify: Individuals born in 1950 or before are required to take an RMD in 2023. Those born in 1951 or later are not due for an RMD this year.
Employees who are still actively working may defer RMDs from their company plan until retirement, but this does not apply to IRAs. Additionally, beneficiaries of inherited IRAs must be aware of the specific withdrawal regulations that depend on the timing of the original owner’s death and the beneficiary’s classification.
Legal Disclaimer: The information provided here is for educational purposes only and is not intended as financial advice. Investing involves risk including the potential loss of principal. TheSmartAsset does not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. You should consult your own tax, legal, and accounting advisors before engaging in any transaction.
