Required Minimum Distributions Have a New Starting Age
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Update: as of March 27, 2020, the CARES Act has waived the 2020 RMD requirement.
Prior to tax year 2020, retirement plan participants and IRA holders (except those with Roth IRAs) had to begin taking required minimum distributions (RMDs) from their retirement plans once they reached the age of 70 ½. Failure to take an RMD has an associated penalty of 50% of the minimum amount. The SECURE Act of 2019 increased the age IRA holders are required to begin taking RMDs to 72, starting in tax year 2020.
What does this mean for individuals who reached age 70 ½ prior to tax year 2020? If you turned aged 70 ½ prior to tax year 2020, you must continue to take required minimum distributions.
However, if you turned age 70 ½ in 2019, you can postpone your first RMD until April 1, 2020 and still count it as your 2019 RMD (the typical deadline to distribute is December 31st of each year). You will still need to take another RMD by December 31, 2020 and to continue taking distributions annually.
The change in the tax law allows individuals who are turning age 70 ½ during tax year 2020 to postpone their RMD until the year they reach age 72. Thus, if the year you turn 72 is your first RMD year, you can further postpone your first RMD until April 1 of the year following the year you turn age 72. The change delays the necessity of taking a required minimum distribution and provides affected individuals with relief from taxation or penalty.
The new life expectancy tables used to calculate RMDs, while not associated with the new tax law change, are another change that will affect future RMD calculations. The Treasury Department recently updated the existing life expectancy tables (i.e., Uniform Lifetime Tables, Joint Life Table and Single Life Table) to reflect more accurate representations of the current life expectancies.
People are living longer according to the administration. A general overview of the changes adds an additional 2 years on average to each life expectancy. The life expectancy changes won’t dramatically alter the result of the RMD calculations, but will reduce the overall amount to be distributed. The Treasury is still seeking comments from the retirement community regarding the new life expectancy charts, but they are scheduled to be effective as of tax year 2021.
If you’re interested in how the new RMD rules will affect your retirement plans, please contact your tax, legal or investment advisor.