pre-tax retirement

Do Your Clients Understand How the SECURE Act Changes RMDs?


We have written recently about the SECURE Act and retirement planning for your clients. But what advice can you offer? This article should help clear up the recent changes.

Mar 13th 2020
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Suppose you reached the milestone of your 70th birthday last year. First, congratulations are in order! Second, if you’re like many retirement-severs, you may be wondering if you must begin taking required minimum distributions (RMDs) from qualified plans and IRAs by April 1 of this year. The short answer is: It depends.

The new retirement planning law passed at the end of 2019—the Setting Every Community Up for Retirement Enhancement (SECURE) Act—pushes back the date for starting RMDs by one-and-a-half years. But this new law change only applies if you didn’t turn age 70½ before 2020 and is leading to considerable confusion. With April 1 right around the corner, it’s important to get things straight.

Starting point: The rules for RMDs apply to employer-sponsored retirement plans— including 401(k) plans, profit-sharing plans, 403(b) plans and 457(b) plans—as well as traditional IRAs and other IRA-based plans such as SEPs, SARSEPs and SIMPLEs. However, they don’t apply to Roth IRAs (other than inherited Roth IRAs).

There is an exception for taxpayers who are still working and don’t own 5% or more of the company. The can postpone RMDs for qualified plans (but not IRAs) until retirement.

The penalty for skipping an RMD is severe. It’s equal to 50 percent of the amount that should have been withdrawn based on IRS-approved life expectancy tables and your account balance in the prior year. When you add on the regular tax you’ll owe, this is certainly a tax problem you want to avoid.

New rules: Previously, you had to begin taking RMDs by April 1 of the year following the year in which you turned age 70½. However, the SECURE Act changes this to age 72. Significantly, the provision went into effect on January 1, 2020, so it will benefit some taxpayers who turned 70 in 2019, but not others.

Example 1: Gerry turned age 70 on December 15, 2019. As a result, he doesn’t turn 70½ until June 15, 2020. Accordingly, the new SECURE Act provision applies to him and he doesn’t have to begin RMDs until April 1, 2022.  

Example 2: Ellen turned age 70 on June 1, 2019. As a result, she turned 70½ on December 1, 2019. Accordingly, the new SECURE Act doesn’t apply to her, so she must begin RMDs by April 1, 2020.

Taxpayers in their seventies who previously were taking RMDs must continue to do so under the latest rules.

Note: Even if you benefit from the extension under the SECURE Act, you may choose to begin RMDS in the year in which you turn age 72, rather than waiting until April 1 of the following year. In that way, you avoid doubling up on RMDs in the same tax year.

Do your clients understand the implications of the SECURE ACT changes for RMDs? Make sure that they are notified and are factoring the new rules into their decisions.

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