2020 will be a year of change for those of us who want to save for retirement, who already are saving for retirement, and for those of us in retirement. Congress passed a law, The Setting Every Community Up for Retirement Enhancement Act of 2019 (the SECURE Act), that changes some of the IRA and retirement plan rules to make it easier for people to save more and hold on to their retirement savings for longer.
For example, many provisions in the SECURE Act are designed to encourage employers to sponsor retirement savings plans so more workers have access to a workplace plan. Changes include:
• Increasing the tax credits available to offset plan start-up costs for small businesses
• Extending the deadline by which an employer can set up a retirement plan for a tax year
• Allowing unrelated employers to join one retirement plan so they can share costs and offload many of the fiduciary and administrative burdens of managing a plan
• Making it easier to adopt and manage a safe harbor 401(k) plan
• Ensuring that part-time employees who meet certain requirements are allowed to participate in a company 401(k) plan
• Making it easier for employers and employees to integrate lifetime income products with their retirement plan savings
The SECURE Act also changes some rules that affect individuals directly, including delaying the age for required distributions from retirement accounts and eliminating the age cap on making contributions to a traditional IRA.
Mainstar Trust will be posting a series of blogs in 2020 to provide you with the details of the changes brought by the SECURE Act that could affect your IRA or small business retirement plan. This blog is the first in the series, addressing the change in age for taking required minimum distributions (RMDs).
The retirement savings rules require individuals to begin withdrawing a minimum amount each year from their retirement accounts when they reach a certain age. Retirement savings primarily consist of pre-tax contributions with tax-deferred investment earnings, so the required minimum distribution (RMD) rules ensure these tax-sheltered savings ultimately become taxable. These rules apply to employer-sponsored plans, like 401(k) and 403(b) plans, traditional IRAs (including those holding SEP plan contributions), and SIMPLE IRAs. Roth IRAs are not subject to the RMD rules while the IRA owner is alive.
These rules have not changed. Retirement savers must still take RMDs. What has changed with the SECURE Act is the age at which distributions must begin.
Savers had to begin taking a minimum payment from a traditional IRA each year starting with the year they attain age 70½. The deadline for taking the first distribution was April 1 of the year following the year they turned 70½. Each year after the 70½ year, an RMD must be taken by December 31. This means two RMDs may be required in one year if the first RMD is not taken until the year following the 70½ year (e.g., by the April 1 deadline).
The starting age for RMDs is now age 72. The deadline for taking the first distribution is April 1 of the year following the year the account owner turns 72. Each year after the 72nd year, a minimum distribution must be taken by December 31. (Again, two RMDs may be required if the first year’s RMD was delayed into the next year.)
This change is effective only for those who were not yet age 70½ by December 31, 2019. If you were age 70½ or older by December 31, 2019, regardless of whether you had begun taking RMDs, you must follow the rules for starting at age 70½. This means you and friends of similar ages may be subject to different rules.
George’s birthday is May 10, 1949. He turned 70 years old on May 10, 2019. He turned age 70½ on November 10, 2019 (six months after his 70th birthday). Because George turned 70½ before the end of 2019, he must begin taking RMDs at age 70½. His first RMD is due by April 1, 2020. His second RMD is due by December 31, 2020. He must take an RMD by December 31 every year thereafter until his IRA is depleted.
George’s wife, Rita, is just a few months younger than him. She turned 70 on July 10, 2019. Therefore, she did not reach age 70½ until January 10, 2020. Because Rita did not reach 70½ before the end of 2019, she is subject to the new age 72 RMD rules. Rita’s first RMD will be due for the year 2021, the year she reaches age 72. The deadline to take her first RMD will be April 1, 2022. Her second RMD will be due by December 31, 2022. She must take an RMD by December 31 every year thereafter until her IRA is depleted.
The rules for calculating the RMD amount have not changed. The RMD amount is calculated by taking the IRA’s December 31 balance from the prior year and dividing it by a life expectancy factor. You can find the life expectancy tables used for these calculations in IRS Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs). (The IRS has proposed updating these life expectancy tables to account for longer life expectancies, but these new tables are not available yet.)
Your RMD may be satisfied with a single payment or in multiple payments throughout the year. If you have more than one traditional, SEP, or SIMPLE IRA, a separate calculation must be completed to determine the RMD for each IRA. But you may take the sum of your IRA RMDs from just one IRA or split the RMD amounts among your IRAs however you wish. If you fail to take an RMD for a year, a 50% tax will apply to the amount that should have been taken but remained in the IRA.
Mainstar will notify its accountholders by January 31 if they are required to take an RMD for the year. Because an RMD may be taken from another IRA, Mainstar will wait for specific accountholder payment instructions before paying out an RMD.