By now, you have heard a lot about the retirement account legislation changes that came with the passing of the Setting Every Community Up for Retirement Enhancement (SECURE) Act in December 2019. We are focusing on just one of those changes in this article: the increased required minimum distribution (RMD) age for all retirement accounts.
Before the SECURE Act, someone with money in a traditional IRA or employer-sponsored retirement plan was required to begin taking withdrawals by April 1st following the year they reached age 70 ½. As an acknowledgment that Americans are living and working longer, the RMD age was increased from 70 ½ to 72. This applies to distributions made after December 31, 2019, for people who turn 70 ½ on or after January 1, 2020. Therefore, anyone who turned 70 ½ in 2019 must continue to take their RMDs under the rules that were in place before the passage of the SECURE Act. This means that the timing of the initial RMD will be 72 years old – which is much easier to calculate than 70 ½.
Plan Sponsors may elect to require distributions at an earlier age and participants may still be able to take money out at 70 ½ depending on the rules of the plan documents, but these are simply options rather than requirements. Plan Sponsors will need to update plan documents to reflect the new RMD age to comply with the IRS change and ensure their procedures are updated for notifying employees of upcoming RMDs.
RMDs for the qualified retirement plans must commence by April 1st of the calendar year following the calendar year in which the individual turns 72, or the calendar year in which the individual retires – whichever occurs later. For example, if you turn 72 in 2021, you will be required to take your first RMD by April 1, 2022, unless you are still working, then it would be delayed until you retire. Owners must begin taking their RMD at age 72, they cannot delay theirs until they retire.
Likely, most individuals will not be affected by this delay because most people cannot afford to delay taking money from their accounts. For those who can afford to wait, they will naturally end up with more savings, however, most financial advisors say that the difference will not be enough to make or break retirement. Likely, the most advantageous aspect of this later RMD age (for those who can afford to wait) will be the additional time to conduct tax planning to minimize the impact of withdrawals when they are made in the future.
Although this age increase will likely impact the minority of the workforce, it is important to note that the increased age will be applied to all individuals who have retirement savings. Financial Advisors and Plan Sponsors alike should take steps to implement the necessary processes to properly apply this change.
PLEASE NOTE: All RMDs have been suspended for 2020 due to Covid-19 and the CARES Act which will modify some of the timing stated above.
If you have any more questions about the RMD age increase or the SECURE Act, we are here for you. Let us know how RPCSI can help.