The Focus - Our Tax E-Newsletter
The Secure Act, Changes Made to Required Minimum Distributions
Retirement. To those active in the workforce, retirement could be the highly anticipated next chapter of life, or a distant goal. For those living in retirement, it is hopefully a well-deserved dream come true. Wherever you are in your journey to retirement, it is important to have an understanding of the tax laws surrounding it. In today's constantly fluctuating world, with changing tax laws and record numbers of retirements, knowing the tax law surrounding retirement has never been more important.
While there is a lot to know, this article focuses on Required Minimum Distributions, or RMDs. The RMD is the amount of money that must be withdrawn from an employer-sponsored, tax-deferred retirement plan (such as profit-sharing, 401(k), 403(b) and 457(b) plans), traditional IRA, SEP, or SIMPLE IRA by owners and qualified plan participants who are of retirement age. The RMD amount is calculated by dividing the prior December 31 balance of that IRA or retirement plan account by a life expectancy factor that the IRS publishes annually.
What is the retirement age? On December 19, 2019, The Setting Every Community Up for Retirement Enhancement Act of 2019, better known as the SECURE Act, was passed into law. The SECURE Act pushed back the retirement age, also known as the Required Beginning Date (RBD), to no later than April 1 after the year that the participant turns 72 or retires— whichever is later. There is an exception for 5% owners in businesses who sponsor retirement plans. They cannot delay RMD's until after retirement and must begin taking the RMD by April 1 after the year they reach age 72. Previously, the RBD was 70 ½ so the change applies to all individuals who reach age 70 ½ after December 31, 2019 (whose birthdays are on or after July 1, 1949). Failing to take an appropriate RMD subjects taxpayers to significant penalties, so proper planning is crucial to ensure that no penalties are incurred and that you are optimizing your retirement plan. Please note that ROTH IRAs were not mentioned above, as ROTH IRAs are not tax-deferred and do not require withdrawals until after the death of the owner.
Another significant change to the SECURE Act is that in the event of the plan owner’s death, there is a provision that largely eliminates the "stretch" technique from estate planning strategies. Under previous law, designated beneficiaries of retirement plans could generally "stretch" the RMDs related to the inherited plan over their lifetime. Changes made under the SECURE Act generally require that the entire tax-deferred account be distributed within 10 years of the death of the account owner. The exceptions to this new rule are designated beneficiaries, including a surviving spouse, a minor child of the account owner up until the age of majority (at which point any remaining balance must be distributed within 10 years), any beneficiary who is chronically ill or disabled, and any other beneficiary who is not 10 or more years younger than the account owner. As such, perhaps consider if a revision to your plan beneficiary may be necessary.
Additionally, the SECURE Act has also repealed the maximum age limit for contributions to a traditional IRA. Under previous law, upon reaching age 70 ½ individuals were no longer allowed to contribute to a traditional IRA. Under the new law, there is no age limit for making contributions to a traditional IRA effective for the taxable years beginning after December 31, 2019, which subsequently would impact the amount of your RMD. These changes are very important to understand from a retirement planning perspective, especially for individuals who have remained or plan to remain in the workforce past the age of 70 ½. For those individuals who have already retired prior to reaching this age, there has never been a better time to contact your financial planners to discuss if continuing to make contributions would be in your best interest.
Planning for retirement can be stressful, but it is worth the effort. Being up-to-date on current rules and regulations will help you implement the most effective retirement strategy for you. Involving your financial planner and local tax advisor in retirement planning and strategizing will help you avoid potentially costly mistakes. We plan to publish additional articles to keep you abreast of changing retirement tax laws. If you have any questions or concerns regarding RMDs and how they could affect you, please contact your tax advisor at Dermody, Burke & Brown.
The information reflected in this article was current at the time of publication. This information will not be modified or updated for any subsequent tax law changes, if any.