Must-Knows About Required Minimum Distributions as 2023 Winds Down

Key Takeaways

• Who needs to take a required minimum distribution in 2023? If you were born in 1951, you use age 73 to start taking RMDs because age 73 applies to anybody who turns 72 in 2023 or later. If you were born in 1950 or earlier, you stick on your old schedule. So, if you turned 72 last year, you still have to take RMDs this year. If you turned 72 in 2023, your first distribution year is when you turn 73 next year in 2024, which means your required beginning date won’t be until April 1, 2025.
• You may be better off taking voluntary distributions because you want to save money in taxes. If you take out a little bit over a longer period, most people will be paying less in taxes.
• Because of Secure 2.0, Congress reduced the penalty for missing an RMD to only 25% from 50%. And if you make up that missed RMD in two years, the penalty goes down to 10%.

Christine Benz: Hi, I am Christine Benz from Morningstar. The Secure Act changed the rules related to required minimum distributions for IRA owners, specifically the age at which RMDs must start. Joining me to help clear up some of the confusion is Ed Slott. He is a tax and retirement planning expert.

Ed, thank you so much for being here.

Ed Slott: Thanks, Christine. Great to be back here.

Who Needs to Take Required Minimum Distributions in 2023?

Benz: It’s great to have you. So, we want to talk about RMDs, required minimum distributions, for people who own their IRAs. They’ve been on a sliding scale related to age. Let’s talk about what’s going on there and who needs to take a required minimum distribution in 2023.

Slott: All right. More confusion here. For years, decades, people knew about 70 and a half. The Secure Act, that’s the original Secure Act a few years ago, changed that to 72. And that was one of the best changes ever made to get rid of that half-year. For years and years, that half-year confused people. They didn’t know if they were 70 or 71, which age do you use, what do I look up on the table, when am I 70 and a half? There were so many questions. So, that half-year thing, I don’t know how—I do know how it got in there, but that’s for another discussion. But it’s gone. So, then they made it 72. And people said, well, that now I know when I’m 72, I’m 72. Well, that changed again with Secure 2.0. It just keeps getting more complicated for people that are going from not having to do anything to being forced to take these required minimum distributions. But that changed in Secure 2.0. Anytime you have a transition, in Secure 2.0, it went from 72 to 73. And it’s even going up supposedly to 75, but that’s 10 years later. We’ll worry about that then. Right now, it’s age 73, which means your RBD, your required beginning date, the date you must start taking RMDs, will be April 1 after the year you turn age 73. But people got confused because they were still getting used to 72. So, people didn’t know: “Do I have an RMD this year?” I actually use a little checklist.

The easiest way to explain it is: Just know the year you were born. That’s it. If you were born in 1951, you use age 73, because the age 73 applies to anybody who turned 72 this year, in ‘23 or later. If you were born in 1950 or earlier, you stick on your old schedule. So, if you turned 72 last year, you still have to take RMDs this year. If you turned 72 this year in ‘23, your first distribution year is when you turn 73 next year in 2024, which means your required beginning date won’t be until April 1, 2025.

Here came the problem. Secure 2.0, which changed the year, the age when RMDs began, was enacted, if you remember, so late in the law, Dec. 29, to be effective a few days later. Well, sometimes you have go-getters, and when it comes to RMDs, I don’t think it’s that good to be a go-getter. In other words, to get that RMD done right in the beginning of the year. As soon as the year turns over, you get people that just want to take care of it. I’m kind of like that, too. I know to do something. I just want to get it out of the way. So, some people did that erroneously because they were advised to by the biggest financial institutions who already had in the works these massive letters and communications they had to send out, that they’re required to send out to IRA owners that have a required minimum distribution. The machinery was already in the works, and they couldn’t stop it. It’s like changing course on a battleship. And the letters went out, and people who turned 72 this year thought, “Oh, maybe I do have an RMD.” And the go-getters took it. So, IRS had to provide relief both for the institutions for giving out incorrect information because it was already in the works, they couldn’t stop it, and to the people who took an RMD—they gave them a limited amount of time—if you already took it, to put that back if you wanted to. But that ship has sailed. You had to do that by Sept. 30. But the point is, if you are turning 72 this year, you don’t have to begin your RMDs till next year.

But if you took it anyway and now it’s too late to put it back, you’re not in a bad position because if you look at the tax rules now with the elimination of the stretch IRA with the Secure and the beneficiaries having a short 10-year window to get all that income out, you may be better off taking voluntary distributions, get more of it out at today’s historically low tax rates. So, maybe M doesn’t mean minimum. The M in RMD stands for minimum. It does mean minimum, but it doesn’t mean maximum. Maybe take more out. Maybe take money out before you even have to, again, to smooth out the tax bill and take advantage of these historically low tax rates we have now.

The Tax Cuts and Jobs Act

Benz: Right. The Tax Cuts and Jobs Act had some really generous provisions taxwise and those expire when? At 2026?

Slott: At the end of 2025, but there was another benefit. Everybody talks about inflation. It’s all you hear, how terrible things cost more. I get that. But when it comes to taxes, inflation is great. We had the biggest expansion of tax brackets because of the high inflation, the cost-of-living factor going from 2022 to 2023. The tax rates are the same, but more money can come out at these low brackets. The brackets were expanded. If you look at the tax brackets from ‘22 to ‘23, you can see how much more money you can get out at low brackets. Now may be the time to strike. I don’t think anybody believes, if they believe in math, believes tax rates for most people will be going down. So, now is the time to take advantage of it.

So, where most people like the idea of delaying RMD till 73 or later, and that’s good because you have more options, it’s your choosing. But what if they delayed it till 80 or 85? Would you wait till then and have all that tax hit? You may be better off taking voluntary distributions because overall you want to save money in taxes. And I think if you take out a little bit over a longer period, for most people, overall, they’ll be paying less in taxes.

Reduced Penalties for Missed RMDs

Benz: That’s a good point. I wanted to ask about these penalties. The waived penalty—not waived, but the reduced penalties. It used to be 50%. Now we’re at 25% on what you should have taken. And if you missed your RMD, you’d be levied that. Do you think—I’ve heard some tax experts, maybe you, say—the IRS is more likely to actually levy this penalty?

Slott: I don’t know. We have to wait to see. But a draconian penalty. Fifty percent was off the charts. It was almost never assessed. Even IRS had a heart and said, “They forgot to take an RMD, we’re going to take half their money?” It’s crazy. So, they waived it in almost every case. So, now, on the Secure 2.0, Congress reduced that penalty, which is still a little heavy, to only 25% for missing an RMD. And if you make it up in two years, it goes down to 10%. When that came out, I said, “I don’t know. We’ll have to see and give IRS a chance.” But I don’t know if they’re going to be as generous. I’d rather pay 50% of nothing than 10% of something. Almost nobody paid the 50%. The message is: Take your RMDs. But now the penalty has been reduced to 25% and to 10% if you make it up, the missed RMD, within two years.

But even so, even if you forget that or you miss out, you’re confused, you have medical or family problems, there are reasons you can still file for a complete waiver just as before. IRS came out and acknowledged that because that was an open question. When it went down to as low as 10%, we were saying, “Can you still get the full waiver?” The answer is yes, but you have to file for it on Form 5329 with your tax return. You have to first make up the missed RMD and then give a short reason, like some of the reasons I just gave: medical issues, didn’t understand—confusion is a good one because everybody’s confused—or a family problem. Whatever the issue, just write in there that it was already taken. Once I discovered it, give the reason why you missed it, and IRS said they’ll look at that and probably waive it. But that remains to be seen. I hope they’ll be as generous as they were in the past when the penalty was much greater.

Do You Need to Take RMDs if You’re Still Working?

Benz: Right, me too. The last thing I want to talk about with you Ed is the workaround for people who happen to be of RMD age, but they’re still working. Can you talk about the implications? Say, they have IRA assets, traditional IRA assets, as well as traditional 401(k) that they’re contributing to, what are the rules there?

Slott: It’s known as the still-working rule, but be warned, it never, ever applies to your IRA. And that’s big. I’m glad you asked about that because sometimes a little information is not good if you don’t understand everything. So, they think if they’re still working, then I can delay RMDs even in my IRAs. No, this does not apply to IRA. So, if you’re still working in a company plan, like a 401(k), a 403(b), and the plan has that option—they don’t have to, it’s optional, but most do—then you can delay RMDs until the year you retire. So, that’s only on the 401(k), your company plan, not on an inherited IRA. So, if you have both, you still have to take the IRA RMD, but not the plan RMD.

Benz: OK, Ed, always helpful information. Thank you for clearing up some of this required minimum distribution confusion. Thanks for being here.

Slott: Thanks, Christine.

Benz: Thanks for watching. I’m Christine Benz for Morningstar.

Watch “Year-End Charitable-Giving Strategies” for more from Christine Benz.