The IRS recently revised the Required Minimum Distribution (RMD) Rules. 3 Things Everyone Should Know.

The federal government promotes retirement savings by offering a tax break for anyone who contributes to certain retirement accounts like a 401(k) or IRA. If you save money in an old tax-deductible retirement account, you can deduct the money you put in on your tax return this year. That gives you more money to invest now.

But finally Uncle Sam wants his tax money. You can’t defer taxes forever because the government imposes a required distribution. Seniors must begin withdrawing money from tax-deferred retirement accounts starting in their 70s, and some inherited IRAs may also be subject to RMDs. . And whenever you take money out of one of those accounts, you’ll have to pay the taxes you took out in previous years.

The penalties for missing out on required distributions can be steep. You may owe up to 25% of the amount you were supposed to withdraw if you don’t do so on time. And you’ll still have to withdraw the money and pay taxes on it.

The latest legislation introduced a number of changes to the required distribution rules, and the IRS issued detailed rules on how it will implement the revised rule in July, clarifying several key points. Here are three things everyone should know.

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1. You must continue to make RMDs for an inherited IRA

If you inherited an IRA from someone who died after December 31, 2019, you may be subject to RMDs on that account.

The SAFE Act changed the rules for inherited IRAs. Instead of being able to stretch the money out over the course of your lifetime, you now only get 10 years in newly acquired IRAs to liquidate the account. There are exceptions for spouses, minor children, beneficiaries under 10 years older than the IRA owner, and disabled or chronically ill beneficiaries.

It was not clear as written whether an IRA inheritor under the 10-year rule must also take RMDs from the first to nine years. The IRS has waived the requirements for 2021 through 2024 but says it will begin enforcing RMDs for inherited IRAs starting in 2025. Anyone who inherits an IRA from a former owner take RMDs you will need to continue taking annual contributions.

While the RMD rule is not retroactive, the 10-year rule still applies to anyone who owns an IRA in 2020 or later. So, it means that some beneficiaries will need to liquidate the entire inherited account by 2030 after taking a small amount from 2025 to 2029.

Since the beneficiaries must liquidate the account within 10 years, it often makes sense to withdraw a certain amount each year to reduce the overall tax burden. However, IRS regulations limit the opportunities that beneficiaries would have had before.

2. Older beneficiaries can take smaller RMDs

If you inherit an IRA from someone younger than you who has already started taking RMDs, you will have to continue taking RMDs from your newly inherited IRA. That can add an extra tax burden to your estate, since you probably have RMDs to take from your accounts.

New IRS rules give relief to elderly beneficiaries. Instead of taking RMDs based on your life expectancy, you can take RMDs based on the original owner’s life expectancy. That results in a smaller distribution from the inherited account.

Additionally, since you are older than the original owner, you will not be subject to the 10-year rule mentioned above. Therefore, you can keep your cash flow as the minimum required throughout your life. However, you will pass the tax burden on to your beneficiaries, who may be subject to higher RMDs and the 10-year rule.

3. Anyone born in 1959 should plan to start RMDs at age 73

The Secure 2.0 Act increased the RMD age from 72 to 73 starting in 2023 and raised it again to 75 in 2033. However, this created a sweet problem for anyone born in 1959. Since they would turn 73 in 2032, they have to take their first RMD in April 2033. But now, they will be 74 in 2033, which is less than the RMD age . So, do 1959 babies have to start taking RMDs at 73 or 75?

The IRS has introduced legislation to clarify the repeal of the Secure 2.0 Act, which will make their minimum required distribution age 73. The following table shows your RMD age based on your year of birth so if the proposed law goes into effect.

Data source: IRS.

Remember that you can delay the required minimum distribution until April 1 of the following year. That said, your next distribution must come out by December 31st of that year, which means that delaying your first RMD will result in two distributions in one year. It usually makes sense to take your first distribution in the year you reach your RMD age to reduce your tax liability.

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