Putting Off Retirement Plan Withdrawals: New IRS Rules Explained

Newly released IRS final and proposed rules that allow workers to keep their money in retirement accounts longer are generating confusion about when certain savers must start drawing down those funds to avoid tax penalties.

People with 401(k), 403(b), and individual retirement accounts can now keep assets in those plans past the age of 70½ without paying heavy excise taxes on withdrawals thereafter under rules finalized July 18 and scheduled to take effect on Sept. 17 (TD 10001; RIN:1545-BP82). The higher ages that trigger mandatory distributions are staggered by birth year.

But questions remain about the age requirements for people born in 1959—an issue addressed in proposed regulations released at the same time as the final rules (REG-103529-23, RIN: 1545-BQ66). The rules also include intricacies concerning beneficiaries and holders of individual retirement accounts.

The IRS has said these changes are necessary to align with the SECURE 2.0 Act, a 2022 law that made sweeping changes to retirement plans. Critics of the regulations have argued they bring unwelcome complexity to an already confusing portion of the tax code.

1. What changed for retirement savers?

The new ages for required minimum distributions increased nearly across the board.

While those with retirement savings who were born before July 1, 1949, reached the applicable age at 70½, someone born between that date and Jan. 1, 1951, must start taking distributions at age 72.

Those born between the beginning of 1951 and the first day of 1959 now must start withdrawing assets at 73, while employees born on or after the first day of 1960 will need to start when they turn 75, according to the final rules.

2. What about people born in 1959?

The final rules don’t address workers born between Jan. 2, 1959, and the end of that year.

However, those savers would be subject to an applicable age of 73, according to the proposed IRS rules, which are still subject to public hearing and potential changes before they are finalized.

The discrepancy is due to an ambiguity in the SECURE 2.0 Act.

The statute made it so individuals born in 1959 were assigned two required start dates for distributions, based on both the years they turn 73 and 75, according to an IRS spokesman.

3. How will beneficiaries be affected?

Beneficiaries who aren’t spouses or young children must follow a 10-year standard for drawing down plan assets, under the new rules.

Those who inherit a savings balance after a deceased plan participant has already triggered their distributions are required to take annual distributions for a nine-year period, and must clear out the entire account balance by the end of the 10th year.

That 10-year rule won’t apply to a spouse, someone who is disabled or chronically ill, or a beneficiary who isn’t more than 10 years younger than the participant.

If the original participant didn’t begin taking minimum distributions yet, those beneficiaries can choose to take distributions in line with their life expectancy or choose to follow the 10-year timeline.

If a participant dies after starting minimum distributions, the beneficiaries can take their withdrawals on a schedule that aligns with the longer life expectancy between the participant and their own. Beneficiaries who are under 21 and inherit retirement savings don’t begin the 10-year countdown until their 21st birthday, at which point they begin annual distributions aligned with their own life expectancy.

4. Do the rules apply differently to IRA asset holders?

Owners of IRAs will be required to take annual distributions on April 1 of the calendar year following the year in which they reach applicable age. The distribution amount will be based on the account balance of the IRA for the final day of the year before the saver’s applicable age.

IRA owners don’t need to provide documentation concerning a beneficiary’s disability or chronic illness to their trustee, custodian, or issuer. A surviving spouse of an IRA owner may also elect to treat the original IRA they inherit as their own account, according to the final rules.

A certain portion of a distribution paid to an employee from a qualified plan may be rolled over to another eligible plan or IRA.

Roth IRA accounts aren’t taken into account when calculating required minimum distributions. A distribution from a designated Roth account made in a calendar year when an employee is required to take a minimum distribution wouldn’t count toward satisfying that requirement.

5. Which aspects of the rulemaking are still not final?

Several provisions were “reserved” in the final regulations, and instead addressed in the proposed rulemaking package.

Aside from the applicable distribution age for employees born in 1959, other pending issues include handling corrective distributions and determining the value of an annuity contract held by an employee.

The proposal also describes measures that would apply in other specific circumstances, including certain spousal elections, instances of divorce after purchase of longevity annuity contracts, or cases with multiple beneficiaries.

A public hearing on the proposed regulation is scheduled for Sept. 25, and comments must be submitted within 60 days of its July 19 publication in the Federal Register.

Read more:

• Final IRS Rules Will Let Workers Keep Cash in 401(k)s Longer
• IRS Minimum Distribution Proposal Baffles Financial Advisers
• Your 401(k) Plan Re-imagined, Again: SECURE Act 2.0 Explained