Understanding the RMD Delay: What Retirees Need to Know

Submitted content by Lisa Haberman, Ed.D., QKA, ChFC, CLU, with Ascensus, a WBA Associate Member

The SECURE 2.0 Act has brought significant changes to retirement planning—especially for retirees aged 72 and older. One of the most significant updates is the delay for retirees to take required minimum distributions (RMDs), which now begin at age 73 (age 75 in 2033). While this offers flexibility, it also introduces new challenges that retirees should understand.

What are the Key Issues Retirees Are Facing?
Let’s take a closer look at the concerns retirees are facing when it comes to taking RMDs.

Distribution Confusion. RMDs must be calculated and taken separately from each employer-sponsored retirement plan (e.g., 401(k) plan). Aggregation of RMDs is allowed only for individual retirement accounts (IRAs)—not for 401(k) plans or other employer-sponsored retirement plans.
Tax Timing Risks. Account owners who delay taking their first RMD until April 1 of the following year (their required beginning date) will take two distributions in one calendar year, potentially pushing them into a higher tax bracket.
Penalty Tax Exposure. While the penalty tax for missing an RMD has dropped from 50 percent to 25 percent (and even 10 percent if corrected timely) of the amount that should have been distributed but was not, the tax consequences remain.
Spousal and Beneficiary Complexity. New rules affect how spouse beneficiaries and successors handle inherited assets, including the introduction of “hypothetical RMDs” and the 10-year payout rule.

Are There Certain Planning Strategies that Retirees Should Consider?
Effective management of RMDs now requires not only careful timing and adherence to distribution rules but also the integration of proactive tax strategies in order to optimize retirement income and minimize unnecessary tax burdens. Here are a few examples for participants to consider.

In-Plan Roth Rollovers (IRRs). An IRR allows individuals to roll over non-Roth assets in a 401(k) plan, 403(b) plan, or governmental 457(b) plan to a designated Roth account under the same plan. Although the taxable portion of the IRR will be included in the individual’s gross income for the year of the rollover, designated Roth account assets are no longer included in RMD calculations, so completing an IRR before reaching RMD age may provide more flexible tax-free income during retirement.
Rolling Over Assets to a Roth IRA. Similar to an IRR, rolling over assets to a Roth IRA before reaching RMD age may help individuals avoid paying taxes in retirement. Pretax assets that are rolled over from a retirement plan to a Roth IRA are taxable in the year of the distribution. Plan participants who choose to roll over pretax assets to a Roth IRA should consider their total taxable income during the year and whether it is in their best interest—tax-wise—to do so.
Qualified Charitable Distributions (QCDs). Although not available to plan participants, QCDs allow IRA owners age 70½ and older to satisfy RMDs without increasing their taxable income. Plan participants interested in taking a QCD may want to consider rolling over their retirement plan assets (if eligible) to a Traditional IRA before they reach RMD age.

What Can You Do Now to Help Your Clients?
Here are a few practical steps that you can recommend to clients to help secure their financial future.