“It seems there were several changes to required minimum distributions (RMDs) because of SECURE 2.0. Can you summarize them?”

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare. We bring Case of the Week to you to highlight the most relevant topics affecting your business. A recent call with a financial advisor from Rhode Island dealt with a question on the SECURE Act 2.0 of 2022 (SECURE 2.0).

Highlights of Discussion
Sure, under SECURE 2.0 there are no less than six changes to RMDs in all. The most talked about adjustment to the RMD rules is the increased and increasing age for starting RMDs. For 2023 through 2032, the age for starting RMDs is increased to 73 (versus 72). The new age applies to participants attaining age 72 after December 31, 2022. That means plan participants who turn 72 in 2023 (those born in 1951) do not have an RMD due this year. Instead, they will need to start taking RMDs when they reach age 73 in 2024 no later than by their required beginning date (RBD) of April 1, 2025. Similarly, SECURE 2.0 increases the RMD age further to 75 starting on January 1, 2033. The new age applies to participants attaining age 74 after December 31, 2032.

Keep in mind, as well, that some plan designs, pursuant to Treasury Regulations, allow participants who 1) continue to work and 2) are not “five percent owners” (i.e., participants who own five percent or less of the employer) to wait to begin RMDs until April 1 of the year following the later of the calendar year in which the participant

• Attains the RMD age (now 73) and
• Retires from employment with the employer maintaining the plan.

We currently are operating under proposed RMD regulations that are pre-SECURE 2.0. Fortunately, the Treasury Department has indicated final RMD regulations are imminent, and we fully anticipate they will reflect the new SECURE 2.0 language.

The next RMD change is exceptionally good news for plan participants. SECURE 2.0 reduces the IRS penalty tax when a participant fails to take an RMD, or takes too little, from 50 percent of the amount not taken to 25 percent. What is even better is, in certain cases, the penalty is reduced to 10 percent for taxpayers who take the RMD before the earlier of 1) an IRS audit or 2) the second year after the year the excise tax was imposed. We can anticipate the IRS will adjust its Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts to accommodate the relief.

Section 204 of SECURE 2.0 immediately eliminates the penalty on partial annuitization with RMDs. If a qualified retirement plan participant’s account holds cash and an annuity contract, current law requires that the account be bifurcated between the portion of the account holding the annuity and the rest of the account for purposes of applying the RMD rules. This treatment may result in higher RMDs. The new rule permits the account owner to elect to aggregate RMD amounts from the annuity portion and cash portion of the account.

Section 313 of SECURE 2.0 limits the period the IRS may impose penalty taxes on the above mentioned RMD failures. Under current law, the statute of limitations for an RMD failure starts running as of the date the individual files IRS Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts to report the violation. Individuals often were unaware of the requirement to file Form 5329. This lead to an indefinite period of limitations, potentially causing hardship for taxpayers due to the accumulation of interest and penalties [see Paschall v. C.I.R., 137 T.C. 8 (2011)]. SECURE 2.0 provides that a three-year period of limitations begins when the taxpayer files an individual tax return (Form 1040) for the year of the violation. This change is intended to ensure that there is a reasonable period of limitations for these violations.

Finally, Section 325 of SECURE 2.0 provides equal RMD treatment for Roth IRAs and designated Roth 401(k) accounts by eliminating RMDs from designated Roth accounts for plan participants for taxable years beginning after December 31, 2023. Owners of Roth IRAs have never been subject to RMD rules while alive.

Conclusion
The changes to RMD rules because of SECURE 2.0 are good news for plan participants. The IRS has some homework to accomplish in the form of final Treasury regulations and updated filing forms to facilitate the changes. It’s important for plan sponsors to get the new rules right. Financial advisors can help plan sponsors ensure recordkeepers and TPAs are correctly implementing the new RMD rules as well as other SECURE 2.0 enhancements.