Julie Jason: Act redefines RMD rules.
Last week, we talked about the law on required minimum distributions (RMDs) for 2019. As anticipated, the president signed the SECURE Act into law on Dec. 20. As a result, beginning in 2020, RMDs will be subject to some new rules. (If you would like a copy of my May 23, 2019, column on the SECURE Act, “New retirement legislation: Change is coming,” let me know at readers@juliejason.com.)
One good thing about the SECURE Act is the move away from age 70 ½ as a measuring date for RMDs. We’ll discuss that change now. In other columns, we’ll go into more SECURE Act changes.
If you are the owner of a traditional taxdeferred individual retirement account, you must begin withdrawing money from that IRA when you reach a certain age.
Because of the passage of the SECURE Act, the timing of your first RMD will be age 72, not 70 1⁄2. That raises questions about the transition from 70 1⁄2 to 72.
Let’s break this down based on birthdays: 1) born before 1949; 2) born between Jan. 1, 1949, and June 30, 1949; 3) born between July 1, 1949; and Dec. 31, 1949; and 4) born after 1949. 1 Born before 1949?
If you are already taking RMDs because you were born before 1949, the SECURE Act’s age72 change does not affect you. Keep taking your RMDs as usual. 1 Born in 1949 between Jan. 1 and June 30?
If you were born between
Jan. 1 and June 30, 1949, the SECURE Act’s age72 change does not affect you. That is because you turned 70 1⁄2 in 2019; you are subject to RMDs calculated on your 12/31/2018 IRA balances. For your first RMD only, you have the option of taking the withdrawal either before the end of 2019 or before April 1, 2020, the required beginning date (or RBD). No matter which option you choose, you will need to take your 2020 RMD based on your 12/31/ 2019 IRA balances before Dec. 31, 2020.
1 Born in 1949 between July 1 and Dec. 31?
Sticking with 1949 birthdays, if you will turn 70 1/2 in 2020 (because your birthday is between July 1, 1949, and Dec. 31, 1949), the SECURE Act age72 change does apply to you. Your first RMD is due in the year you turn 72, which will be in 2021. Your first RMD will be based on your 12/31/2020 IRA balances.
1 Born after 1949?
Wait until the year you turn age 72 to take your first RMD. You don’t have to worry about the complexities of figuring out age 70 1⁄2requirements for any IRA or taxdeferred account matter.
Let me add a few cautionary notes.
First, be sure to check with your accountant, lawyer, or IRA custodian before taking any actions. As we discussed in the past, the annual RMD is not optional. It is mandated by law. And there are heavy financial penalties for failing to take the RMD on time. The penalty (an excise tax) is 50 percent of the amount you should have withdrawn. For example, if you missed your 2019 RMD of $10,000, you owe the U.S. Treasury $5,000.
Second, this discussion has to do with rules that govern the owner of a traditional IRA. We’ll talk about 401(k)s and Roth 401(k)s in a future column, as well as the SECURE Act’s new rules on inherited retirement accounts withdrawals.
Third, official IRS resources are not updated yet for the SECURE Act. (The bible on withdrawals is IRS Publication 590B, “Distributions from Individual Retirement Arrangements (IRAs),” at irs.gov/pub/ irspdf/p590b.pdf.)
On another note, applications are now open for the second annual national 401(k) Champion Award honoring 401(k) participants who “love” their 401(k)s. A 401(k) Champion not only recognizes the potential of his or her 401(k) as an investing opportunity, but also seeks to inspire others to participate in (and/or maximize) their 401(k)s. For those of you who participate in your 401(k) at work and want to be recognized for your knowledge, apply for the award at juliejason.com/ award. 401(k) sponsors: if you would like to inform your 401(k) participants about the award, please email readers@juliejason.com.
Julie Jason, JD, LLM, a personal money manager (Jackson, Grant of Stamford) and author, welcomes your questions/comments (readers@juliejason.com). Her awards include the 2018 Clarion Award, symbolizing excellence in clear, concise communications. Her latest book, a curated collection of Julie’s columns, is “Retire Securely: Insights on Money Management From an AwardWinning Financial Columnist.” To hear Julie speak, visit juliejason.com/events.