SECURE and SECURE 2.0 did not help

We spend all our working years saving and saving, so when that magical day comes, we can start spending money for retirement. Your friendly federal government encourages this by deferring taxes on the money we save as long as we follow the rules and have it in a qualified retirement account.

But your government only has so much patience. Part of the deal is that this will force you to start withdrawing your retirement funds and paying the associated taxes. The amount you must withdraw is called your required minimum distribution, or RMD. Originally, you had to start withdrawing money when you reached age 71½. When you died, your beneficiaries were also treated favorably, extending compulsory withdrawals to the inherited account.

Then the government started tinkering. In 2019, it adopted the SECURE Act and in 2022, it adopted the SECURE 2.0 Act. The IRS has joined in clarifying regulations, most recently on July 18, 2024. More regulations have been proposed.

After all changes, the mandatory starting age for payments is 73 years. However, it varies depending on the type of retirement account.

The magic age for distributions from a traditional IRA, SIMPLE IRA, SEP IRA or retirement plan is 73 (if you reached age 72 before December 31, 2022, then the upper limit was age 72).

The magic age for withdrawals from a 401(k), profit sharing, 403(b) or other defined contribution plan is 73, with one big caveat: If your retirement plan allows it, you can delay withdrawals until you retire, provided you do not own 5% or more of the company.

The best of all worlds is your Roth IRA. You don’t have to withdraw money from your Roth IRA throughout your life.

For RMD, time is of the essence. Typically, your first RMD is due on April 1 of the year after you reach your target age. Your second RMD is due on December 31 of the same year.

There is a grace period for individuals who have reached the required age change from 72 to 73 (due to changes included in the SECURE 2.0 Act). If you turn 72 in 2023, you must take your first RMD by April 1, 2025. This first distribution covers your required distribution for 2024. There are no RMDs for 2023.

We all know that a retirement plan has two parts: your life and after your death. The first part – throughout your life – is when you need to take RMDs. The second part is when your beneficiaries must take the RMD after you die.

If your spouse is the beneficiary, then your spouse may choose to transfer your account to your spouse. The withdrawal time is extended.

For most other individual beneficiaries, the SECURE Act and SECURE 2.0 have produced woeful changes. If you had RMD status when you died, your beneficiaries must withdraw your entire account within 10 years. The final rules apply to distribution calendar years beginning on or after January 1, 2025. Due to the uncertainty surrounding withdrawals prior to the issuance of the final rules, there is no penalty or requirement to make up missing RMDs for 2021-2024.

The law in this area is complicated and the penalties burdensome. Trust the experts who will solve it for you.

Attorney Virginia Hammerle will present legal information about power of attorney from 11:00 a.m. to 12:30 p.m. on October 8 (Tuesday) in the Park Forest Branch Library auditorium, 3421 Forest Lane, Dallas. Registration is required. To register, visit dallaslibrary2.orgclick Events, select Park Forest Branch and click “Power of Attorney for Virginia Hammerle.”

Attorney Virginia Hammerle is certified in civil trial law by the Texas Board of Legal Specialization and is an accredited estate planner. To receive her monthly newsletter, contact her at [email protected] or visit Hammerle.com. This column does not constitute legal advice.