Simplifying SECURE 2.0 Act on- Required Minimum Distributions (RMD) and Reduced Penalties in 2023

Mar 2, 2023 | 2023, Retirement Plan Law

The SECURE 2.0 Act raises the age from 72 to 73 when individuals must begin taking RMDs from their retirement accounts. Reduced penalties include:

  • Failure to take an RMD is reduced from 50% to 25%
  • The penalty is further reduced to 10% if a failure is corrected

SECURE 2.0 Act Removed and Replaced the “Stretch” IRA and 401(k)

The previous “stretch” IRA and 401(k) strategy allowed a non-spouse beneficiary of an inherited IRA or 401(k) to stretch the distributions and tax payments from the account over the course of their lifetime. The “stretch” has been replaced with the 10-year rule:

  • Non-spouse beneficiaries are now required to take distributions from the retirement account within 10 years of the death of the original account holder
  • If the account isn’t emptied within 10 years, any remaining assets may be subject to a 25% penalty

Exceptions to the 10-year rule for eligible designated beneficiaries.

An eligible designated beneficiary must always be a person, not an entity, and must fit into one the following 5 categories:

  1. Participant’s or IRA owner’s surviving spouse
  2. Participant’s or IRA owner’s child who is less than 21 years of age – once age 21, the 10-year rule will apply
  3. A disabled individual
  4. A chronically ill individual
  5. Any other individual not more than 10 years younger than the decedent

Beneficiary Changes to Distribution IRS Notice 2022-53

When participants pass away after they start taking the required minimum distributions, their beneficiaries are required to continue the required minimum distributions each year. Beneficiaries must distribute the account within 10 years after the death of the participant, unless they are an eligible designated beneficiary (described above).

Penalty Changes

The recent release of IRS Notice 2022-53 brings with it clarity about the issue and relief to plan sponsors and designated beneficiaries. Here are a few highlights:

  • Defined contribution plans that failed to make 2021 or 2022 life expectancy payments to designated beneficiaries who were required to continue the RMDs, but failed to do so, will not be treated as having failed to satisfy the RMD requirements.
  • The 50% penalty is waived for RMDs not taken in 2021 and 2022 for beneficiaries who were required to continue the RMDs but failed to do so.
  • If the 50% penalty was paid, the taxpayer can request a refund of that excise tax.
  • The IRS plans to issue final regulations related to RMDs that will apply no earlier than the 2023 distribution calendar year.


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