RMD Starting Age Now 72 – The Good & Bad Secure Act

THE SECURE ACT:

 In December 2019, Congress passed the “Setting Every Community Up for Retirement Enhancement” (SECURE) Act.  (Long name with a misleading acronym.)  This retirement legislation impacts defined contribution (401k) plans, defined benefit (retirement) plans, individual retirement accounts (IRAs) and 529 plans.  Most parts of the plan became effective January 1, 2020.  Here are a few of the major features — good and bad.  Major impacts are on your Required Minimum Distributions (RMD) and on inherited IRAs.

 RMD STARTS AT AGE 72 – GOOD NEWS

Starting Jan. 1, 2020, you need to start withdrawing money from your traditional IRA retirement accounts at age 72, rather than age 70.5.  This allows your money to grow tax-free for two more years.  It also does away with confusion for people who are 70 years old, having to figure out if they are over or under 70.5 at the end of the year.  It will be simple.  If you are 72 or older, you need to be taking an RMD from your IRA.

WHAT HAPPENS IF I STARTED MY RMD in 2019?

The short answer is, too bad!  If you are currently receiving RMDs (or should be) because you are over age 70.5, you must continue to take your RMD  Only those who turn 70.5 in 2020 (or later), may wait until age 72 to start taking their RMD.

INHERITED IRA DISTRIBUTIONS – VERY BAD NEWS

For anyone who inherited an IRA from an original IRA owner who passed away prior to January 1, 2020, no changes to your current distribution schedule are required.  However, if the original IRA account owner passes away after December 31, 2019, fewer beneficiaries will be able to extend distributions from the inherited IRA over their lifetime.

Distributions from a Traditional Inherited IRA are taxable.  So, the longer your beneficiaries can postpone or defer distributions, the better off they will be.   But the government wants to tax this money, sooner rather than later.  By forcing beneficiaries to take distributions at an accelerated rate, the government gets more money and you get less.  This virtually kills the Stretch IRA.

DISTRIBUTIONS OVER 10-YEARS FOR MOST BENEFICIARIES

If you inherit an IRA and unless you are a spouse or qualify for one of the other exceptions below, you will be required to take distributions over 10-years rather than over your expected lifetime.  Most will want to take the distributions annually, over 10-years.  But you can also take all the distributions in one-shot, at the end of 10-years.  Individual circumstances and tax brackets will determine which is better.

Spouses:  Spouses will still be able to stretch the IRA RMDs over their lifetime.

Children:  Minor children who are beneficiaries of IRA accounts also have a special exception to the 10-year rule, but only until they reach the age of majority.  As minors, no required distributions are due until age of majority.  Once they reach the age of majority, they must complete the distributions within 10-years.  What needs to be clarified is what the age of majority is, since it varies by state statute.

Other Exceptions:  Minor children, disabled or chronically ill individuals, and beneficiaries who are less than 10 years younger than the IRA owner will be able to extend the RMD, but not necessarily forever.

Non-Spouses and “Other Non-Exceptions”:  If you are not a spouse or “other exception” and inherit an IRA, you will need withdraw all assets from the inherited IRA within 10 years following the death of the original account holder.

WHAT HAPPENS IF I INHERITED AN IRA BEFORE 2020?

Anyone who inherited an IRA before the end of this year can still draw down the account over their lifetime.

ROTH IRAs

The provisions of the SECURE Act also apply to Inherited Roth IRAs.  This means that if you inherit a Roth IRA and are not a spouse (or other exemption applies), distributions must be over 10-years, rather than over your lifetime.  At least distributions from a Roth IRA are not taxable.

YOU CAN NOW CONTRIBUTE TO AN IRA PAST 70.5 – GOOD NEWS

You can now continue to contribute to your traditional IRA in the year you turn 70.5 and beyond, provided you have earned income.  This eliminates the age-cap for contributing to an IRA.

BOTTOM LINE

Good News:  RMDs now start at age 72 rather than 70.5.

Good News:  You can contribute to a traditional IRA and not have to stop at age 70.5, provided you have earned income.

Bad News:  If you have an IRA or a retirement plan that you are planning to leave to your children in a tax efficient manner after you are gone, you need to be concerned.  The beneficiaries must now drain the IRA within 10-years from being tax-sheltered, thus eliminating the “Stretch IRA”.

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