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The fourth quarter is here, and we’d like to help you prepare your clients with qualified retirement plans for year-end 2023 by providing you and your clients some frequently asked questions and answers about Required Minimum Distributions.
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1.What is a Required Minimum Distribution?
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If your client owns a qualified retirement plan (i.e., IRAs, including SEP and Simple IRA Plans) and is age 73 or older during the 2023 tax year, the Internal Revenue Service (IRS) requires them to take a Required Minimum Distribution (RMD) from their retirement account each calendar year. Please note that, beginning in 2023, the SECURE 2.0 Act raised the age that your client must begin taking RMDs to age 73. If your client reached age 72 in 2023, the required beginning date for their first RMD is April 1, 2025, for 2024.
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2.When must a client take their RMD if required to do so?
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As an example, if 2023 is the first year your client is required to take an RMD, they have until April 1, 2024, to do so for the 2023 tax year. However, they would also be required to take the 2024 tax year RMD by December 31, 2024, meaning they will take two RMD withdrawals in one year.
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Due to the Secure 2.0 Act, if your client reached age 73 in 2023, they were 72 in 2022 and will have previously taken their first RMD.
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If your client has previously taken an RMD, they are required to take their RMD by market close on the last business day of December each year.
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3.When does the RMD need to be withdrawn from the contract every year?
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The RMD can be withdrawn anytime between the first business day of the tax year, and before the market closes on the last business day of the tax year, which is typically December 31, unless that date is on a weekend as it is in 2023. The 2023 tax year deadline is market close on December 29, 2023. Please note that certain riders may impact the timing of a RMD withdrawal.
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4.Can the client take a RMD from one qualified account instead of separately from each of their qualified accounts?
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If the client owns multiple IRAs, they must calculate the RMD separately for each IRA that they own but can withdraw the aggregate RMD amount from one or more of the IRAs. Please note that Contingent Deferred Sales Charges (CDSCs) may apply at Talcott or other companies. Please have your client consult with a tax advisor to determine the impact these rules may have on them.
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Similarly, if they own multiple 403(b) plans, they must calculate the RMD separately for each 403(b) they own but can withdraw the aggregate RMD amount from one or more of the 403(b) plans.
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For retirement plan types such as 401(k) and 457(b) plans, RMDs must be taken separately from each plan account.
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5.Is the client required to take an RMD from their 401(k) or other type of employer plan?
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RMDs are required from 401(k), profit shares, 403(b), or other defined contribution plans by April 1 of the year following the calendar year in which you either reach age 73 or retire. Please have your client consult with a tax advisor to determine the impact these rules may have on them.
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6.What happens if the client doesn’t take their RMD or fails to withdraw the full amount of their RMD by the required deadline?
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If the client is required to take an RMD and they do not withdraw a RMD or fail to withdraw the full amount of the RMD, or they do not withdraw the RMD by the applicable deadline, they may be subject to an IRS penalty. Prior to 2023, the IRS assessed a 50% RMD penalty. Effective in 2023, the percentage may vary if certain criteria are met. For more information, please have your client consult with a tax advisor.
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It is the client’s responsibility to make sure that their RMDs are satisfied. Talcott Resolution will indicate on the Form 5498 submitted to the IRS when an RMD is required. Please have your client consult with a tax advisor with questions regarding RMDs.
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Clients can sign up today for Status Notifications to be alerted when certain activity, including the processing of RMDs, is initiated within their contract. They can log into the Annuity Service Center and navigate to the “Manage Contract” tab to manage their notification preferences.
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