How The SECURE Act Affects Your Required Minimum Distributions
By Todd Youngdahl, CFP® and Maura C. Schauss, CFP®
The Setting Every Community Up for Retirement Enhancement (SECURE) Act was signed into law on December 20, 2019. The Act contained a broad array of retirement-related provisions. The provision that has the most far-reaching effects has to do with the age at which people must start to draw down their retirement accounts.
What Is A Required Minimum Distribution?
One of the greatest benefits of saving into a retirement account specifically is the tax advantages. In order to entice people to plan for the future, the government allows them to defer paying taxes on the money they invest. However, the government depends on those tax revenues and doesn’t want them deferred indefinitely. That’s why they created required minimum distributions (RMDs).
RMDs are the minimum amount a saver must withdraw from a retirement account beginning at a specific age. The amount that must be taken is based on life expectancy and designed to drain the account within the owner’s lifetime. That way, the government knows when they will be able to start collecting taxes on those savings. Failure to take an RMD incurs a hefty penalty; any amount not withdrawn is taxed at 50%.
RMDs apply to all employer-sponsored retirement plans, such as 401(k)s, 403(b)s, 457(b)s, and profit-sharing plans. They also apply to traditional IRAs and IRA-based plans like SEPs, SARSEPs, and SIMPLE IRAs. They do not apply to Roth IRAs, though they do apply to Roth 401(k)s. Converting Traditional IRAs to Roth IRA’s is a strategy that could be used to minimize RMD’s at the required age.
How Does The SECURE Act Change Required Minimum Distributions?
The big change that the SECURE Act made to RMDs was the age at which they must begin. Previously, that age was 70½. Now it is 72. That means the year that an investor turns 72, they become subject to RMDs and will have to take them every year for the rest of their life (or until their accounts are depleted).
Usually, RMDs must be taken every year by December 31 to avoid the penalty. However, the very first year a person is subject to RMDs, they have a little bit more time, until April 1 of the following year. So, if a person turns 72 in 2020, then they can either take their first RMD in 2020 or before April 1 in 2021. If they choose to put off the RMD until 2021, they will have to withdraw a larger amount because they will have their regular 2021 RMD as well.
When Does The SECURE Act Take Effect?
The SECURE Act went into effect at the beginning of 2020. That means anyone who turned 70½ in 2019 is currently subject to RMDs, and anyone who is younger gets to wait until they turn 72. To turn 70½ before 2020, an investor would have to be born before July 1, 1949. Anyone born after that gets an extra year or two before they must begin taking required minimum distributions, depending on where in the year their birthday falls.
If you are getting close to your 70s, it is important for you to understand how RMDs work and when you must begin taking them. Failure to withdraw the full amount on time results in a 50% penalty tax, so it is not something to take lightly. With such major consequences, it is wise to work with an experienced financial advisor who can help you calculate the amount that must be taken and the best timing in light of your overall financial plan. If you don’t already have a trusted advisor to guide you through this, we may be able to help. Call our office at 703.584.2700 or email firstname.lastname@example.org for a complimentary consultation.
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