SECURE Act Deep-Dive: Required Minimum Distributions (RMDs)
Among the many new provisions of the SECURE Act, the change in age – from 70½ to 72 – at which Required Minimum Distributions (RMDs) must commence is one of the most significant. While this is a welcomed change, in many ways, the rule remains a confusing burden for retirees. In this article, we address the RMDs rule both prior to SECURE Act and after, why RMDs can be problematic, and what may be on the horizon in terms of future changes.
The Challenges of RMDs
The purpose of the RMD rules is to require retirement plan participants to withdraw some of their funds as taxable distributions while still alive, instead of deferring taxation and leaving these funds as inheritance. The difficulty lies in the rules’ nuances. Prior to the SECURE Act, initial Required Minimum Distribution (RMDs) were required to be made from retirement plans the later of the following:
- (a) April 1st of the year following the calendar year in which a participant turns age 70½, or
- (b) April 1st of the year following the calendar year in which a participant retires
If a participant owns 5% or more of their employer, clause (b) does not apply, and he/she must commence distributions by April 1st of the year following the year in which he/she turns age 70½, regardless of employment status. The definition of 70½ is the date six calendar months following a participant’s 70th birthday.
Future RMDs must be made annually by December 31st. Thus, if a participant received his/her initial required distributions on April 1st, a second RMD will be required by December 31st of that same year, with an annual RMD by December 31st each year thereafter.
If an individual has multiple retirement plans, he/she must satisfy their RMDs separately for each plan and withdraw that amount from that plan. The exception to this being multiple 403(b) plans. In this situation, a participant can take the total RMDs due from all 403(b) plans from any one of his/her 403(b) plans. The withdrawal amount for RMDs requires a special, complicated calculation, completed by the retirement plan recordkeeper(s).
Understandably, explaining the RMD rules to the average senior citizen, with no prior retirement background, is quite difficult. And getting it wrong is equally costly. For any missed RMDs, the IRS assesses a penalty equal to 50 percent of the amount of the missed RMD. It is easy to understand why one of the most common defects in retirement plans is the failure to take RMDs
SECURE Act “Improvements”
The SECURE Act increased the RMD commencement age from 70½ to 72. While seemingly minor, this change should allow for fewer RMD failures in retirement plans, as retirees will no longer be required to remember the date of their half-birthday. As an increasing problem that is high on the Department of Labor’s radar screen, However, this is the only change that was made to RMDs by the SECURE Act, and all of the other provisions described above remain the same.
Furthermore, the new RMD requirements might prove more confusing in the short-term, due to the grandfathering rule that is part of the SECURE Act. Here is how it works:
- Participants who turned age 70½ on, or before, December 31st, 2019 (i.e., those born prior to July 1st, 1949) are subject to the old RMD rules. Thus, those who retired in 2019 or before must take their initial (2019) RMD by April 1st, 2020, and must take their second RMD by December 31st, 2020, even if they are not yet age 72 in 2020, since the new rule does not apply to them. However, if they are still working, they can delay the distribution until April 1st following the year of retirement.
- For participants that turned, or will turn, age 70½ after December 31st, 2019 (i.e., those born on or after July 1st, 1949) the new RMD rules apply. This means that these participants will need to take their initial minimum required minimum distributions until April 1st following the later of the calendar year in which they turn age 72, or retire.
Thus, those who are retired and were born on June 30th, 1949, must take their initial (2019) RMD by April 1st, 2020 and their second (2020) RMD by December 31st, 2020. However, retirees born just one day later, on 7/1/1949, do not need to take their initial RMD until April 1st, 2022 (since they will have turned 72 on 7/1/2021) and their second RMD until December 31st, 2022. That one day makes a great deal of difference; now imagine attempting to navigate this as a retiree!
Where Do We Go From Here?
While the SECURE Act is the first significant piece of retirement plan legislation since the Pension Protection Act of 2006, it is unlikely that there will be another long period without additional retirement plan legislation being passed. Considering the number of voters who are likely to retire in the next decade, we may witness growing opposition to the RMD rules leading to changes such as further increasing the commencement age (age 75 was floated as a legislative alternative), eliminating RMDs for small account balances, decreasing the 50% penalty for failing to take RMDs, or even eliminating RMDs entirely.
For a comprehensive look at the SECURE Act provisions, please click here. Stay up to date with the SECURE Act by visiting the Knowledge Center on our website or following Cammack Retirement on LinkedIn or Twitter.
Note: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice. Opinions expressed are those of the author, and do not necessarily represent the opinions of Cammack Retirement Group.
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