New Rules for IRA Distributions

Key Takeaways

• What are the implications of Secure 2.0 for people who are already in retirement and are perhaps pulling from their retirement accounts?
• The rules around missing RMDs also appear to have gotten a little bit more lenient.
• How the qualified charitable distribution is an attractive opportunity for people who are aged 70.5, how Secure 2.0 makes a few tweaks to it.

Christine Benz: Hi, I’m Christine Benz from Morningstar. New retirement legislation has major implications for people who are already retired. Joining me to discuss what Secure 2.0 means for required minimum distributions is tax and retirement planning expert Ed Slott.

Ed, thank you so much for being here.

Ed Slott: Great to be back with you.

Benz: Well, it’s great to have you here. Now, I’m curious. We saw the passage of what’s called Secure 2.0, this piece of retirement-related legislation that passed at the very end of 2022. Were you surprised that this legislation squeaked through as the year wound down?

Slott: I was surprised. It went all the way down to the wire down to Dec. 29, that was the date of enactment, it had to be actually shipped to the president to be signed. About the Secure 2.0 part, remember that was just one part of the big omnibus appropriations bill that ran over 4,000 pages. I wasn’t surprised Secure 2.0 made it through because that had huge bipartisan support. The thing is, would it have been attached to something that would pass? And eventually, that did pass in the midnight hour, so to speak.

Benz: I want to delve into the implications of Secure 2.0 for people who are already in retirement, perhaps they are pulling from their retirement accounts. One of the big changes that was part of Secure 2.0 is that it pushes out the required minimum distribution age. Can you talk about what’s going on there?

Slott: There was a lot of talk about that as landmark legislation. But overall, there was nothing I would call landmark or even earth-shattering or game-changing, nothing transformative like the original Secure Act was, where they eliminated the stretch IRA and the 10-year rule—big changes. This was more fixing up, trimming around the edges. And yes, they increased the age. They pushed it back from 72 to 73. So, some people, again, are going to be confused, “Does this apply to me?”

The best way to figure it out: If you’re born between 1951, because most people know when they were born, so 1951 through 1959, you can use age 73. If you’re already taking RMDs, you must continue. Another way to say it who can use age 73: anybody who turned 72 in ‘23 or later. But go back to the birth years. So, that’s who gets to use 73. Now, there was a lot of misinformation. I don’t know if I’d call it misinformation, but a lot of articles that came out right after the bill was signed. In the headline, they said, the RMD age was raised to 73 and then to 75. Forget 75. That doesn’t happen for 10 years, in 2033. So, put that out; 73 is the age.

Well, it gives you one more year of freedom to do whatever you want before RMDs begin. So, you could do more Roth conversions, for example, another year.

Benz: The rules around missing RMDs also appear to have gotten a little bit more lenient. Can you talk about that?

Slott: Pushing back RMDs sounds good. But remember, the more you push it back, the more that eventually has to come out into a shorter window of time, and that could cost you more money long term. So, while you don’t have to take it till now 73, you might want to start pulling it out earlier, doing Roth conversions. The key is to get as much of your IRA money out when the rates are the lowest, and they are rock-bottom historically low right now in 2023, given the huge inflation increase. They always said inflation is bad. Not when it comes to tax rates; the brackets are expanded. This is the time to hit it. So, I might not look at delaying. I might look at expanding that window, get more of your IRA money out while the rates are low.

Benz: And people’s tax rates may also be low in those early years of retirement, right?

Slott: Yeah.

Benz: I want to talk about missing required minimum distributions. Seems like the penalties are a little bit lighter as a result of Secure 2.0. Can you talk about what’s going on there?

Slott: A lot lighter. The draconian penalty for missing an RMD, as many people know, has been for years, forever, 50%—50% of the amount you should have been taking but didn’t. That is now dropped to 25%, so that’s a big drop, and even lower to 10% if you make up or take the missed RMD within two years. But I’m a little skeptical about this one. Almost nobody, I would say, ever paid the 50%. IRS rarely assessed that because it was such a harsh penalty. I’m wondering if more people may end up paying it now that it’s only 10%. For example, I’d rather pay 50% of nothing than 10% of something. So, the message is, make sure you take your RMDs.

Benz: Well, that’s a good point. I want to talk about the Roth 401(k) part of Secure 2.0. In the past, required minimum distributions were due on those Roth 401(k)s, not to be confused with Roth IRAs. Now, it sounds like those will be lifted. Can you talk about what’s going on there?

Slott: That’s a great move. As you said, Roth IRAs never had lifetime RMDs, not for beneficiaries, but lifetime, your own. But Roth 401(k)s were part of a 401(k) plan, so they always did. This is a great move. Now, starting in 2024, there will be no RMDs for Roth 401(k)s. So, you don’t have to worry about leaving it in the plan. What people were told to do in the past was as you got near your RMD age, roll it out to a Roth IRA. Now you don’t have to do that anymore.

Benz: So, people who like their retirement plan, their company-provided retirement plan and they let them stick around, that might be a good option if they’re in the Roth.

Slott: Yeah, it was a good change.

Benz: So, last question for you, Ed, relates to this qualified charitable distribution, which you and I have talked about on numerous occasions. It’s an attractive opportunity for people who are aged 70.5. Can you talk about the QCD, what it is and also how Secure 2.0 makes a few tweaks to the QCD?

Slott: Well, it’s a great provision if you qualify. It’s only for IRA owners or IRA beneficiaries who are 70.5 or older. Notice Secure or Secure 2.0, neither one changed the age. Even in each of those laws, the RMD age went from 70.5 to 72, then 72 to 73. But for QCDs, it’s still 70.5. So, that’s good. More people can do direct transfers—and that’s what a QCD is, a qualified charitable distribution—a direct transfer from their IRA directly to the charity. Normally, most people now get no tax benefit on the gifts they give to charity. So, this is a great way to get a benefit, an exclusion from income that can actually satisfy an RMD, and you can even do it if you’re charitably inclined, get that money out before RMDs even begin because of the wider gap now, 70.5 to 73.

So, the change now—it was a $100,000 limit. I thought that was enough for most people, but apparently, some in Congress thought it should be higher. So, they’re going to inflation-adjust that in a year or two. Right now, it’s still $100,000. But they also added a provision allowing people to do a one-time $50,000 QCD to split-interest charities. For example, a charitable remainder trust, a charitable gift annuity, they weren’t allowed before, but now they’re allowed. Donor-advised funds are still not allowed, and private foundations are still not allowed. I don’t know how many people are going to take advantage of that. Because the way the rules are written, you’d have to set up a separate entity, a separate charitable remainder trust, for example, just for the $50,000. I don’t know if the cost is worth the benefit in that, but it’s in there.

Benz: Ed, lots of good food for thought for people who are entering retirement or already in retirement. Thank you so much for being here to share your perspective.

Slott: Thanks, Christine.

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

Watch “Everything You Need to Know About Roth IRAs” for more from Christine Benz.