RMD Regulations: Rewriting the Retirement Planning Playbook
Part of a series | SECURE 2.0 Act Insights
The latest IRS Required Minimum Distribution (RMD) regulations represent a strategic transformation in retirement planning and present an opportunity for more proactive financial management for retirement plan participants.
It's not an exaggeration to say that the retirement savings of American workers continue to be impacted by the increasingly complex regulatory landscape — especially the recently-issued new regulations regarding Required Minimum Distributions (RMDs).
With these changes, there are significant implications for plan sponsors, participants and beneficiaries — including potential challenges and opportunities to help employees optimize retirement outcomes.
What's changed with RMDs
Here's a summary of the new regulations, and what plan sponsors need to know.
RMD calculation
To reflect longer life expectancies, the IRS adjusted the metrics used to calculate RMD amounts, resulting in lower annual withdrawal amounts for many retirees.
Age
Prior to the updated guidance, participants were required to start taking RMDs by April 1 in the year after they turned 72 and were no longer employed. Beginning in 2024, the starting age for RMDs was raised to 73 for individuals born in 1951 or later. The age will raise to 75 as of 2033.
Penalty deduction
The IRS has introduced more forgiving penalty structures for missed or insufficient RMDs. Previously, failing to withdraw the required amount could result in a 50% excise tax on the undistributed amount. The new excise tax was reduced to 25%, and may be reduced to as low as 10% if the error is corrected promptly
Beneficiary distribution rules
Changes have also been made regarding the RMD requirements for beneficiaries of inherited retirement accounts. Regulations provide nuanced guidelines for different beneficiary categories:
Eligible designated beneficiaries (EDBs), including:
- Surviving spouses
- Minor children
- Disabled individuals who meet the IRS definition of disability
- Chronically ill individuals, as certified according to IRS criteria
- Beneficiaries who are not more than 10 years younger than the participant
EDBs can take distributions based on their life expectancy, or all funds must be withdrawn within 10 years of the participant's death.
Designated beneficiaries (DBs)
- Non-spousal beneficiaries more than 10 years younger than spouse
- Adult children
DBs are required to withdraw all funds from the account within 10 years of the participant's death. If the participant had already begun taking RMDs, the beneficiary must continue taking them.
Non-designated beneficiary (NDB)
- Any non-individual beneficiary such as trusts, estates and charities not covered above
NDBs must generally withdraw all funds from the account within five years of the participant's death. But note that special rules may apply for look-through trusts.
Adapting to change
The IRS's new RMD regulations represent a shift in retirement account management.
- Longer accumulation periods mean more potential tax-deferred growth
- Reduced penalties create a more forgiving compliance environment
- Beneficiary rules now demand more strategic estate and tax planning
It's more important than ever to maintain proper beneficiary designations and to encourage participants to ensure they're updated. The key to successfully navigating changes to retirement regulations is staying informed and adjusting financial strategies to align with the latest guidelines.
For plan sponsors, it's critical to keep your plan participants up to date on the latest RMD requirements. If your current plan doesn't include regular employee communications, connect with an ADP retirement planning services specialist to learn more about our focus on financial wellness education.
ADP, Inc., and its affiliates do not offer investment, tax, or legal advice to individuals. Nothing contained in this article is intended to be, nor should be construed as, particularized advice or a recommendation or suggestion that you take or not take a particular action. Questions about how laws, regulations, guidance, your plan's provisions, or services available to participants may apply to you should be directed to your plan administrator or legal, tax or financial advisor.
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