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November 20th, 2023

Untangling The Confusion Around RMDs (Required Minimum Distributions)

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Lydia B. from Hartford, CT asks: Hello Mitch, it seems like there have been a lot of rule changes in the retirement planning realm in the past year. Is there anything I need to know about Required Minimum Distributions this year or next? Thank you!

Mitch’s Response:

Thank you for writing, Lydia. You ask a timely question, given that Required Minimum Distributions (RMDs) for many retirees are due by the end of the year. Still a few weeks left.

There has historically been quite a bit of confusion around RMDs. For several years, the RMD age was set at 70 ½, which was not the most user-friendly age for something as important as required withdrawals from an IRA. What’s more, people had until April 1 of the year following the year they turned 70 ½ to take their first RMD, which is far from straightforward.1

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Thankfully, the RMD age changed with the passage of the SECURE Act, and was raised to around 72. But with the recent passage of the SECURE 2.0 Act, the age has moved up to 73 in 2023, and then will go up to 75 in 2033. But let’s focus on the current rule for the current year.

The easiest way to wrap one’s head around RMD age rules is to focus on the year you were born. If you were born in 1950 or earlier, then the old RMD rules apply to you. If you were born in 1951, then you can use 73 as the age when you need to take RMDs. Since people born in 1951 will turn 73 in 2024, that’s the year when RMDs start – which also means you have until April 1, 2025 to take your first RMD. Then you’d have until the end of 2025 to take your ‘second’ RMD, and it goes on from there.

Another important change from the SECURE 2.0 Act is the penalties for missed or ‘under-withdrawn’ RMDs. In the past, the IRS would penalize people 50% for missing an RMD, which was seen as extremely punitive. It’s been reported that the IRS rarely enforced such a harsh penalty. With new provisions in SECURE 2.0, this penalty has been reduced to 25%. Furthermore, if the individual corrects the shortfall within a specified “correction window,” the penalty can be further reduced to 10%.

A final change to RMDs from the SECURE 2.0 Act is a new benefit allowing individuals aged 70½ or older to make a one-time gift of up to $50,000 from their Individual Retirement Account (IRA) to a charitable remainder trust (CRT) or a charitable gift annuity.

A charitable remainder trust is a tax-exempt, irrevocable trust that first disperses income to the beneficiaries of the trust for a specified period of time, and then donates the remainder of the trust to a designated charity. Although the $50,000 one-time gift is not tax-deductible, it does count towards the individual’s Required Minimum Distributions (RMDs) for the year. This may be particularly beneficial in the event it helps the donor avoid being pushed into a higher tax bracket when taking distributions from their IRA.

There are many options for strategically taking an RMD, so if you have questions about what strategy might work best for your specific financial situation, I’d encourage you to reach out to Zacks Investment Management with questions.

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Disclosure

1 Morningstar. November 8, 2023. https://www.morningstar.com/retirement/must-knows-about-required-minimum-distributions-2023-winds-down

2 Zacks Investment Management reserves the right to amend the terms or rescind the free Adaptive Advantage for Your Successful Retirement offer at any time and for any reason at its discretion.

3 Zacks Investment Management reserves the right to amend the terms or rescind the free Adaptive Advantage for Your Successful Retirement offer at any time and for any reason at its discretion.

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This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. Do not act or rely upon the information and advice given in this publication without seeking the services of competent and professional legal, tax, or accounting counsel. Publication and distribution of this article is not intended to create, and the information contained herein does not constitute, an attorney-client relationship. No recommendation or advice is being given as to whether any investment or strategy is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole.

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