The SECURE 2.0 Act was created to make it easier for Americans to save more money for retirement. And, while these provisions will benefit investors regardless of how close to, or far into, retirement they are, several provisions won’t be effective immediately.
Here we highlight changes to Required Minimum Distributions (RMDs). The full report 2023 Retirement Guide covers additional provisions that are particularly important to individuals with assets held in employer-sponsored retirement plans and IRAs in the coming years. Please keep in mind that the provisions are subject to additional clarification and interpretation, so please consult with your plan provider, financial advisor, and tax advisor before taking any action in response to the provisions listed below.
Changes to RMDs
1. Increase in age for RMDs: If you’re turning age 72 this year, your retirement assets get to stay invested in your account for one more year.
Thanks to the SECURE 2.0 Act, if you reach age 72 in 2023 or later, then you don’t have to start taking RMDs until you reach age 73. And, if you reach age 73 in 2033 or later, then you won’t be subject to RMDs until you reach age 75. Although, the effective date for when the applicable age will increase to 75 is pending clarification.
If your birth year is between 1951 and 1959, the age when RMD begins is 73. If your birth year is 1960 or later, the age when RMD begins is 75.
If you turn age 73 in 2024, you have until 1 April 2025 to satisfy your first RMD (2024’s RMD). And you’ll have until 31 December 2025 to take your second RMD. Please bear in mind, if you choose to take both RMDs in a single tax year, if could cost you more in taxes by pushing you into a higher tax bracket.
If you are not yet taking RMDs, the delayed RMD age means that you can delay taking assets from your retirement accounts, but that does not necessarily mean that you should. After all, deferring your taxable retirement account withdrawals—and thus compressing your taxable income into fewer years—could push you into a higher tax bracket in later years, increasing the overall tax cost of funding your retirement.
Instead of sticking to the minimum distributions required by the government, we recommend working with your financial advisor and your tax advisor on a strategy that maximizes your after-tax wealth potential.
One strategy is to take advantage of your “gap years”: the period between your retirement date and the point at which you begin receiving Social Security benefits and taking RMDs. During these years, you will generally have lower-than-normal taxable income, and thus face lower-than-normal tax rates. By moving some of your taxable income from later retirement years (when you will face a higher tax bracket) into your gap years, you can reduce the overall income tax rate on your retirement account distributions.
In some cases, you may want to take advantage of your gap years by distributing the funds to your taxable account and either reinvesting them or using them to fund near-term spending. In other cases, we would recommend implementing partial Roth conversions, transferring a portion of your Traditional IRA/401(k) to a Roth IRA/401(k).
The dollar amount of your Roth conversion will count as taxable income, so conversions in low-tax years are a great way to fund tax-exempt assets that will continue growing, won't be subject to lifetime RMDs, and will pass income tax-free to your beneficiaries. For more information, please see "You should consider a partial Roth conversion this year.”
2. Reduced penalty for failure to take your RMD: Before the SECURE 2.0 Act was passed, if you failed to take your RMD on time, you would be subject to a penalty tax of 50% of the RMD amount that was not distributed.
Beginning in 2023, this penalty is reduced to 25%. What’s more, if you are able to correct the missed RMD in a timely manner, the penalty is reduced further to 10% of the RMD amount that was not taken on time.
3. Roth 401(k)s are now exempt from RMDs: Under current law, you are required to take lifetime RMDs from your Roth-designated account in an employer retirement plan (e.g., 401(k) plans), but not from your Roth IRAs.
Starting in 2024, you will no longer be required to take lifetime RMDs from Roth assets in 401(k) plans. This means, once this rule takes effect, Roth assets in Roth IRAs and Roth 401(k)s will both be exempt from lifetime RMDs.
4. Surviving spouse election to be treated as employee: The SECURE 2.0 Act expands the post-death RMD options for surviving spouses to include the ability to elect to be treated as the deceased spouse (beginning in 2024). Once the election is made, it cannot be revoked except with the consent of the Secretary.
A surviving spouse who makes this election would begin RMDs no earlier than the date the deceased spouse would have reached the applicable RMD age. If the surviving spouse dies before RMDs begin, the RMD rules would apply as if the surviving spouse was the employee. This means that the surviving spouse's beneficiaries will be treated as though they were the original beneficiaries of the account.
Additionally, if the surviving spouse is the employee's sole designated beneficiary, then the applicable distribution period is determined using the uniform table. It's important to note that clarification on how this will work is needed.
For more ways the Secure 2.0 Act will affect retirement and what's new with Social Security and Medicare in the light of recent inflationary pressures, see the full report 2023 Retirement Guide 6 January 2023.
Main contributors: Ainsley Carbone, Justin Waring, Daniel J. Scansaroli, and Katie Williams
This content is a product of the UBS Chief Investment Office.