We have an important update on the recently finalized IRS regulations regarding required minimum distributions (RMDs). These finalized rules include some notable changes from the 2022 proposed regulations, particularly around annuity exemptions and inherited IRAs.
RMD Required Age
The SECURE 2.0 Act, passed in December 2022, brought about changes to the RMD rules, most notably the increase in the age threshold. Under the finalized regulations, RMDs are now required once you reach age 73, up from the previous threshold of 72. By 2033, this age may rise further to 75, providing more flexibility in retirement planning.
Penalties for Missed RMDs
One of the most significant updates is the reduction in penalties for missed RMDs. Previously, the penalty was a steep 50% of the amount not taken. The finalized regulations, reflecting changes proposed in 2022, have reduced this penalty to 25%, and it can drop further to 10% if you correct the distribution error within two years.
Qualified Longevity Annuity Contract (QLAC) Updates
QLACs have also seen important updates. The new regulations increase the purchase limit for QLACs from $125,000 (or 25% of your retirement account balance) to $200,000, removing the previous percentage limitation altogether. This adjustment aligns with the 2022 proposed regulations but offers clearer guidelines on implementation.
Inherited IRAs
While the 2019 SECURE Act required most non-spouse beneficiaries to distribute the inherited IRA funds within 10 years, the latest regulations clarify that many beneficiaries will now be required to take annual RMDs starting in 2025. This is a shift from the more ambiguous guidance in 2022, which left many beneficiaries uncertain about how to comply.
Roth 401(k)s and Roth IRAs
Starting in 2024, RMDs will no longer be required from Roth 401(k) plans, bringing them in line with Roth IRAs, which have long been exempt from these requirements. This change removes a layer of complexity for those managing retirement accounts and planning distributions.
