Brett Arends's ROI: New rules mean required withdrawals from retirement accounts have become even more complex

The tax year ends in less than three months, and financial advisers are facing a challenge reassuring their clients about changes to the laws on required minimum distributions, or RMDs, from retirement plans.

In the last four years, two laws have changed the rules about RMDs. “There is confusion,” says Scott Bishop, managing director at Presidio Wealth Partners in Houston — both about RMDs for IRAs inherited after Jan. 1, 2020, when the Secure Act 1.0 went into effect, and about the rules related to the new, higher age of 73 for RMDs that were set by the Secure Act 2.0, which became law on December 29, 2022 .

“The IRS has released several notices providing RMD relief, but it also seems to be adding to the confusion,” he adds.

“We are getting lots of questions about this from clients,” says Jude Boudreaux, a financial planner at the Planning Center in New Orleans. “This year it’s super confusing, since the RMD age has changed so much recently. Is it 70.5? 72? 73? The changes to inherited IRA rules are still not very clear.”

Advisers are “getting hammered” on this issue, says veteran financial planner and tax adviser Ed Slott, who is an expert on IRAs. He adds that RMD rule changes “are confounding advisers this year like never before.”

The original rules for RMDs were already complicated. You had to start withdrawing money from tax-deferred retirement plans, such as IRAs, once you turned 70½, but who keeps track of their 70½th birthday? The deadline for starting to make withdrawals was the year after this demibirthday.

Meanwhile, regarding the amount you need to to withdraw, the IRS explains, “a RMD is calculated for each account by dividing the prior Dec. 31 balance of that IRA or retirement plan account by a life expectancy factor that the IRS publishes in Tables in Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs).

Oh, and there isn’t just one table to use for your long division. There are three: The Uniform Lifetime Table III, the Joint and Last Survivor Table II, and the Single Life Expectancy Table I.

“Choose the life expectancy table to use based on your situation,” the IRS says helpfully.

The penalties for making a mistake and withdrawing too little, or too late, were not merely onerous but confiscatory: 50% of the amount not withdrawn.

Read: The days of IRS forgiveness for RMD mistakes may soon be over

Those arguing that this system is designed to punish rich people trying to cheat the IRS should ask themselves who is more likely to get tripped up by rules like this: Rich people, with their army of professional accountants and lawyers, or everybody else?

In 2019, Congress passed the Secure Act — which stands for Setting Every Community Up for Retirement Enhancement. It raised the required starting age to 72. In 2022 Congress passed Secure 2.0, raising the age to 73. It also lowered the penalty to 10% — if you fix your mistake within two years.

Adding to the complexity, under the new law, the starting age is scheduled to rise again, to 75 — but not until 2033, just in time for Social Security’s financial crisis. This may be a coincidence.

The multiple changes to a complicated system have inevitably led to more confusion and uncertainty. 

Read: What’s the best way to take RMDs from your retirement accounts? Experts rate the top 3 strategies.

The first Secure Act “raised the RMD age from 70½ to 72,” says Nicholas Bunio, a financial planner with Retirement Wealth Advisors in Downington, Pa. “So, for those 70½ and 71, they could pause their RMDs … until they turned 72. The confusing thing started when Secure Act 2.0 passed right at the end of last year. This now increased the RMD age to 73 (not 72) for 2023 and beyond. So for those 72 this year, they can still pause their RMD until next year.”

But when you cut through all the fog, the key rule for 2023 is surprisingly simple, advisers confirm. If you were born in 1950 or earlier, you have to take RMDs this year. If you were born any later, from one minute after midnight on Jan. 1, 1951, you don’t.

“Bottom line: If you were born in 1950 or earlier, you will have an RMD this year,” Bishop says. “If you were born in 1951 or later, you will not have one this year.”

Slott says the same thing.

And Clark Randall, a planner with Creekmur Wealth Advisors in Dallas, adds this: “The easiest way to understand when RMDs need to start is by looking at the participant’s date of birth. Those born in 1950 or earlier have a 72 RMD age. Anyone born between 1951 and 1959 must take their RMDs starting at age 73. Finally, for those born in 1960 or later, they will have to start required minimum distributions at age 75.” 

This applies to your own tax-deferred retirement accounts, including IRAs, Simple IRAs and, if you’re retired, 401(k)s, but not to inherited accounts. The rules on those are complex. Roth accounts, which are financed with after-tax dollars, do not have RMDs.

Oh, and there’s one more wrinkle. ”For those who do need to take their very first RMD, they technically can wait until April 15 of the following year,” says Bunio. “Otherwise, it’s Dec. 31 of the current year for future RMDs.” So, he adds, even if you turn 73 this year, you actually can wait till next April 15 to make this year’s RMD. 

Got that?

A previous version of this column inaccurately suggested that some people born in 1951 would turn 73 this year.

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