The IRS has issued an important reminder for small business owners aged 73 and older regarding their retirement plans. As we approach the end of the year, those turning 73 in 2024 must be aware of new regulations under the SECURE 2.0 Act, including deadlines for Required Minimum Distributions (RMDs) from their retirement accounts. This update is crucial for small business owners who may rely on these distributions for financial planning in their later years.
Currently, RMDs are mandated withdrawals that individuals must make from their retirement accounts, including traditional IRAs and employer-sponsored plans, starting at a certain age. If account holders fail to take their RMDs on time, they risk facing steep penalties, including a 25% excise tax on the undistributed amounts. However, this penalty can be reduced to 10% if the error is corrected within two years.
Understanding RMDs becomes even more critical for small business owners as they plan their finances and retirement strategies. The IRS report highlights that for individuals who turn 73 in 2024, the first RMD is due by April 1, 2025. This will be calculated based on the account balance from December 31, 2023. The second RMD must follow by December 31, 2025, based on the balance as of December 31, 2024, allowing additional time to address these financial obligations.
Notably, the SECURE 2.0 Act introduced beneficial changes, including raising the age for mandatory RMDs and eliminating RMDs for designated Roth accounts within 401(k) and 403(b) plans while the account owner is alive. This allows further tax-advantaged growth of these accounts, which can be a significant boost for small business owners looking to preserve wealth.
Cathy Smith, a financial advisor serving small business clients, stated, “Understanding RMD timelines and requirements is essential for anyone nearing retirement. These new provisions in the SECURE 2.0 Act provide more flexibility and enhanced strategies for retirement funding.”
Many small business owners may have both personal retirement accounts and those associated with their business. Each account’s RMD must be calculated separately, although total withdrawals can come from multiple sources. This flexibility allows business owners to better manage their cash flow while fulfilling IRS requirements.
In dealing with RMD calculations, the responsibility lies primarily with the account owner to ensure that the correct distributions are taken. While the plan administrator may calculate RMDs and report them, business owners must actively monitor their accounts to avoid potential penalties. Resources like RMD worksheets provided by the IRS can facilitate proper calculations.
One of the critical factors that business owners should be aware of is related to inherited retirement accounts. Beneficiaries of traditional IRAs or retirement plans may also face RMD obligations, which can differ based on their relationship to the deceased account holder and the age of the original account owner at the time of death. The regulations can be complex, especially with recent changes introduced by the SECURE Act.
To aid small business owners in navigating these requirements, the IRS website offers numerous resources, including publications on RMDs and guidance specific to beneficiaries of inherited accounts. Staying informed helps mitigate the risks of tax penalties and ensures compliance with IRS guidelines.
Ultimately, these changes under the SECURE 2.0 Act not only provide opportunities for tax planning but also present potential challenges for small business owners as they approach retirement. By understanding RMD requirements, utilizing available tools, and considering the impact on cash flow and investment strategies, small business owners can better position themselves for a secure financial future.
For more detailed information on RMDs and the recent updates, small business owners are encouraged to visit the IRS’ official page here.
Image Via BizSugar
