RMD Age Raised to 73 in 2023

Within the $1.7 trillion omnibus bill passed by Congress are a potpourri of sweeping changes to retirement plans–some of the biggest changes made in many years, including increasing the age of Required Minimum Distributions to age 73 starting for tax year 2023. 

Congress continued the trend of delaying Required Minimum Distributions. Many savers don’t like to be forced by the government to take RMDs, instead preferring to see their savings grow, especially given lifespans have increased. During the height of COVID, Congress allowed RMDs to be skipped for 2020 and later increased the RMD age to 72, and now in 2023 the age increases to 73 and will later increase to 75 in 2033. 

Another impactful change to RMDs is the steep penalty for failing to take an RMD has been reduced. Prior to the bill, if an IRA holder failed to take an RMD they were charged a 50% penalty of the RMD. That has been reduced to 25% and can be 10% if corrected in a timely manner. 

Emergency Withdrawal Option

There is a also a new relief for a retirement accountholder in need of emergency cash. Retirement account holders who withdraw funds prior to age 59 1/2 pay a 10% penalty. The bill contains a provision that waives the fee for an $1,000 emergency withdrawal if it is made for the “purpose of meeting unforeseeable or immediate financial needs relating to necessary personal or family emergency expenses.”

Charitable Changes

One strategy IRA holders employ to do good and reduce their tax obligation is to make Qualified Charitable Distributions from their IRAs. The bill allows IRA holders 70 1/2 and older to do a one-time $50,000 withdrawal to fund a charitable gift annuity or charitable remainder trust. 

529 Roth Option

The government created 529 plans to help deal with the high cost of higher learning. One of the uncertainties with 529 plans for savers was the prospect of the child not going on to higher learning or having unused money in the 529. Prior to the bill, money in 529s that was not used could be designated to another family member for the purpose of higher learning or the account holder could pay a 10% penalty to withdraw the funds. The bill introduces a new option–allowing up to $35,000 of the 529 to be transferred into a Roth IRA. The 529 must be more than 15 years old under this change. 

Roth 401k Gets Roth IRA Attribute

Unlike Traditional IRAs that require RMDs, Roth IRAs do not require RMDs. Interestingly, Roth 401(k)s, which are not that widespread, did require RMDs, until now. The new law eliminates RMDs for Roth 401(k)s starting in 2024. 

Catch Up Amount Boosted for Older Workers

Prior to the new law, workers over the age of 50 could put an extra $6,500 in their 401(k)–that has been increased to $10,000. 

Tax Advisor Best to Assist

As always, members should consult with their tax advisor when assessing the impacts of any tax law changes. The new law includes a host of other changes around using 401(k)s for paying off student loans, mandating more investment options in 401(k)s, requiring small businesses to offer 401(k)s and more.