Executive Summary
There’s been a lot of talk lately about IRAs and how your retirement and estate planning will be affected. If you haven’t heard, the SECURE Act is what all the buzz is about. This legislation was signed into law on December 20th, 2019 and took effect on January 1st, 2020.
Most importantly, your IRA required beginning date is now delayed by a year and a half. This is a good thing as it allows you an additional year plus to do some intense tax planning specifically with Roth IRA conversions. Roth conversions will lower your overall required minimum distribution.
This additional time to do tax planning can be worth its weight in gold! Your IRA required minimum distributions may be large enough to push you into higher tax brackets, and proactively planning for these IRS requirements can save you thousands of dollars in taxes over your retirement.
Let’s look at how the new SECURE Act affects the required beginning date withdrawals from tax-deferred IRAs.
What is the IRA Required Beginning Date for IRA Required Minimum Distributions?
The SECURE Act changes the age at which you must begin taking withdrawals from your tax-deferred IRA – increasing the age from 70 ½ to 72 (as long as you didn’t turn 70 ½ in 2019 in which case the older rules apply to you).
The IRS gave you this great tax-deferred retirement savings account but they want their pound of flesh at some point. When exactly do they want it? There’s a lot of confusion out there, especially now with this new law, regarding the IRA rules for required minimum distributions (RMD’s).
When it comes to RMDs, every IRA owner has to take them, they’re required by law after all. The penalty for missing your IRA required minimum distribution is 50% of the amount which was supposed to be withdrawn (but not withdrawn). With a penalty like that, it’s important you understand the nuances of IRA RMDs.
How Does the IRA Required Beginning Date For Withdrawals Work?
Before the SECURE Act, your required beginning date (RBD) was April 1st of the year AFTER you turn 70 and 1/2. That’s the date at which you MUST take your first IRA required minimum distribution.
The SECURE Act increases your first RMD from 70 ½ to 72 years of age.
This law went into effect in 2020, so if you turned 70 ½ in 2019, you are not affected (which means you need to take your first RMD before April 1st of 2020 – or get hit with a 50% penalty).
If you turn 70 ½ in 2020 or later, you can wait until you turn 72 to begin taking required IRA withdrawals. If you are still working at this age and have an employer-sponsored pre-tax retirement account, you do not need to take withdrawals from your retirement plan at work until you officially retire (an element that was not changed by the SECURE Act).
This is CRITICAL INFORMATION! If you miss your required minimum distribution it’s quite painful! That penalty is 50% of the amount you should have—but didn’t—withdraw . . . OUCH!
Most IRA owners don’t miss their RMD because they don’t wait until April 1st of the year after they turn 72 (previously age 70 ½) to make their first withdrawal. Most IRA owners make the withdrawal in the year they actually turn the magic age set by the IRS.
Here’s why . . .
If You Wait Until 4/1 You’re Actually Increasing Your Distributions In That Year
You need to understand what having two distributions in a single year means, because it can be financially painful as well!
Your first required minimum distribution now starts when you turn 72 (unless you turned 70 ½ in 2019). The IRS simply gives you a grace period on your first required distribution.
That grace period is April 1 of the following year. In subsequent years, you need to take your yearly RMD by Dec. 31st.
The key here is that IRA distributions are taxable for the year IN WHICH received, not the year FOR WHICH received. If you make the actual distribution in the year you turn 72 it’s taxable in that year. That’s the year FOR WHICH and IN WHICH it was received.
If you push the required distribution until April 1st of the following year it’s taxable in the following year IN WHICH it was received even though it was a distribution FOR the prior year (the year when you turned 72).
Pro Tip: If you choose to wait until April 1st of the year after you turn 72 (or 70 ½, for those who turned 70 ½ in 2019) you would have two distributions in a single year: one for the year in which you reached the magic age, and another one for the current year. Avoid doing this if the additional required minimum distribution will push you into a higher tax bracket. If you stay in your marginal tax bracket it’s not as big of a deal to double up by delaying to the following year.
Should I Wait Until 4/1 Of The Following Year To Take My First Distributions?
Why would you delay your required minimum distribution until 4/1 of the year after you turn 72? There are a couple of reasons, such as to avoid being pushed into a higher tax bracket (which depends on what your income situation looks like). Another reason would be to delay tax payments for as long as possible.
Let’s say for example you had a lot of earned income in the year you turn 72. Any extra IRA distributions in that year may have pushed you into an even higher tax bracket – so waiting until the following year could be advantageous for you.
Some IRA owners want to defer the amount of tax owed as long as humanly possible. That’s another reason to wait until 4/1 of the year after you turn 70 1/2 to make your first required distribution.
Just remember, if you push the required distribution off until 4/1 of the following year you’ll be required to make TWO distributions in that year. Depending on your situation, this could be advantageous or it could push you into a higher tax bracket, forcing you to “donate” more of your hard-earned tax dollars to the government than you otherwise would have been required to.
If you are confused or unsure exactly what to do (especially if you turned 70 ½ in 2019 and you were planning on taking an RMD in 2020), then reach out to your most trusted financial planner so that together you can re-evaluate your financial and retirement plan.
How Much Is My IRA Required Minimum Distribution?
The amount of the required minimum distribution is always determined by dividing your IRA account balance on December 31st of the prior year by your life expectancy factor. If you make your ‘age 72’ IRA distribution the year you turn 72, your 12/31 balance will be reduced by that amount.
Having the 12/31 balance reduced effectively lowers the amount of your required distribution the following year. This is another reason to avoid “doubling up” on your very first IRA required minimum distribution. In addition, you’ll only make one required distribution in each of those tax years.
If you want to calculate your IRA required minimum distribution, you can find your life expectancy factors on this handy Key Financial Data Cheat Sheet here.
Know the IRA Required Minimum Distribution Rules Before It’s Too Late!
There’s a lot to consider with your required beginning date and required minimum distributions. It’s important to make the best decision possible, and being proactive with Roth IRA conversions in your 60’s can take a huge lifetime “tax” weight off your shoulders!
Generally speaking, it’s best to make your year 72 distribution in the actual year you turn 72. Taking your required minimum distribution when you’re required to start distributing will lower your following year’s RMD, likely reduce your overall taxes in each year, and give you some extra cash to enjoy retirement!
What Else Did The Secure Act Change?
The Secure Act will undoubtedly have an impact on how we go about financial planning. Here are some of the major elements of the Secure Act:
- The maximum age for traditional IRA contributions (which was limited to age 70 ½) now repealed
- Inherited IRAs must now generally be depleted in 10 years (revoking the popular ‘Stretch IRA’ strategy)
- Long-term part-time workers granted permission to participate in employer-sponsored retirement plans
- To help pay for student loans, parents can now withdraw up to $10,000 from 529 plans
- Allows soon-to-be parents to withdraw up to $5,000 from retirement accounts penalty-free to help cover birth and adoption expenses
IRA RMD Required Beginning Date In Summary
The Secure Act brings with it some uncertainty and has sent many people scrambling to meet with estate and retirement planners. As with any change, it can be hard at first, but the best thing you can do is to understand how this new legislation affects you now and how it will affect you in the future.
Pay special attention to proactively planning your future required IRA minimum distributions INCLUDING how you invest your pre-tax IRA monies versus your taxable and Roth IRA monies. According to Morningstar and Vanguard, these things have a massive added value to your retirement financial planning.
If you aren’t sure what to do, reach out to your financial experts or feel free to contact me to discuss your options and make sure you are ready to retire the way that you deserve.
Required Beginning Date Frequently Asked Questions
Under the new Secure Act, the Required Beginning Date for IRA Required Minimum Distributions is when you turn age 72. You have until 4/1 of the year AFTER you turn age 72 to distribute the required amount or face a 50% penalty on the amount not withdrawn.
Generally, you should take your IRA required minimum distribution in the year you turn age 72 rather than waiting until April 1st of the following year. This will avoid you being forced to “double-up” your required minimum distribution the following year, it will reduce your following year’s required distribution amount (because your 12/31 balance will be reduced), and possibly keep you in a lower overall tax bracket.