Questions are arising about how the SECURE Act’s new age 72 RMD (required minimum distribution) works, especially for those who are age 70 1/2 now. The complication is when, how and to whom the new age 72 mandate applies. (Tax laws determine the minimum you are required to take out of your retirement accounts).
The SECURE Act
The SECURE Act was signed into law on Dec. 20, 2019. One provision (effective Jan. 1, 2020) replaces age 70 ½ with age 72 as the age that triggers RMDs from retirement accounts, such as traditional IRAs, SEPs, SIMPLEs, SARSEPs, 401(k)s and other defined contribution plans.
Personally, I’m looking forward to the day we don’t have to calculate a ½ birthday. But, we’re not quite there yet. The defining year is 1949.
Born after June 30, 1949
Section 114(d) of the SECURE Act makes it clear: “The amendments made by this section (replacing age 70 ½ with age 72) shall apply to distributions required to be made after Dec. 31, 2019, with respect to individuals who attain age 70 ½ after such date.”
Who “attain[s] age 70 ½ after [Dec. 31, 2019]?” — anyone born after June 30, 1949. Put another way, if your birthday is July 1, 1949 or later, you can benefit from the SECURE Act’s age 72 RMD rule.
To clarify how the new age 72 RMDs works, take a look at Table 1, below.
The first three columns are descriptive (Birth Month, Birth Year, and “Age 72 in”).
The next two columns need explanation.
“RBD” stands for the “Required Beginning Date” and “Use Balance From” refers to the date you need to use to look up the value of your IRA or retirement account to calculate your RMD.
Let’s take an example. If you were born anytime in 1953, you would turn 72 in 2025, which would be the first year that you would be subject to your RMD. To calculate your RMD for 2025, you would use your IRA balance from Dec. 31, 2024. Your RBD is April 1, 2026.
RBD: A Decision You Need to Make
The RBD introduces a decision you need to make about the timing of your first (and only your first) RMD.
Going back to the example, let’s assume that your RMD is $X for 2025 based on your Dec. 31, 2024 IRA balance. (You would arrive at $X based on a calculation using applicable IRS actuarial tables provided in IRS Pub. 590-B).
You have two options: 1) take that RMD in calendar 2025, or 2) take two RMDs in 2026, the 2025 RMD of $X by your RBD (April 1, 2026) and your 2026 RMD for $Y based on your Dec. 31, 2025 balance, which must be withdrawn by Dec. 31, 2026.
In Table 2 notice that the RBD is good only for the first RMD (see “N/A,” not applicable, in Table 2 for the second and third RMDs).
In Table 2, the “Timing” shows that your first RMD can be taken in calendar 2025 or by your RBD in 2026. You’ll also see the 2026 RMD which must be taken during the 2026 calendar year.
If you decide to do 1) above, the 2025 RMD will be taxable income in 2025. If you decide on option 2), you’ll pay income taxes on both your 2025 RMD and your 2026 RMD in a single tax year (2026); each of these RMDs will generate an IRS Form 1099-R for income received in 2026.
Born Between July 1, 1948 and June 30, 1949
Now, let’s return to the first one-half of 1949 and pick up the last one-half of 1948.
If your birthday falls between July 1, 1948 and June 30, 1949, the SECURE Act’s age 72 rule does not apply to you. Why? As shown in Table 3, below, you reached the age of 70 ½ in 2019, before the effective date of the age 72 provision of the SECURE Act.
2018 Balances or 2019 Balances or Both?
If you turned 70 ½ in 2019, your 2019 RMD is calculated based on your Dec. 31, 2018 IRA or employer plan balance, as shown in Table 4, below. Your 2020 RMD is calculated based on your Dec. 31, 2019 balances.
RBD of April 1, 2020?
Since it is now January 2020, if you did not take your first RMD in 2019 (based on your being born between July 1, 1948 and June 30, 1949), you still have time to take your 2019 balance by April 1, 2020.
The RMD will be $X based on your Dec. 31, 2018 balances. But, don’t forget, that you’ll also take your 2020 RMD of $Y by Dec. 31, 2020, based on your Dec. 31, 2019 balances.
If you are taking both your 2019 and 2020 RMDs in 2020, you’ll report both RMDs as income on your 2020 tax return.
In case there is any doubt about when one turns 70 ½, here is another resource: “Your required distributions begin in the yearyou turn 70 ½. That means that those of us who are born from January through June turn 70 ½ in the same year we turn 70. For the rest of us who are born from July through December, we turn 70 ½ in the year we turn 71,” quoting Age 70 1/2 Confusion For Retirement Accounts.
Thankfully, the complications of figuring out when a ½ birthday occurs will all subside soon.
Let me add a few cautionary notes.
First, the annual RMD is mandated by law; there are heavy financial penalties for failing to take the RMD on time. The penalty (an excise tax) is 50 percent of the amount you should have withdrawn but did not. For example, if you missed your RMD of $10,000, you owe the U.S. Treasury $5,000.
Second, keep in mind that the required beginning date of April 1 is a one-time-only option, only for your very first RMD.
Third, there is a lot more to the SECURE Act that needs to be understood beyond this discussion. For one, there is no longer a prohibition against people over 70 ½ (or older) contributing to an IRA (section 107). Another major change affects what happens after the IRA owner dies shortening the length of time a beneficiary is allowed to “stretch” distributions unless the beneficiary is an “eligible designated beneficiary” (section 401). Another expands 529 plans (section 302).
Fourth, official IRS resources that are available online have not been updated yet. (The bible on withdrawals is IRS Publication 590-B, “Distributions from Individual Retirement Arrangements (IRAs).” Also be aware that new life expectancy tables will likely be adopted in 2021. The bottom line is that more is to come. . .
Fifth, RMD software such as Brentmark is being updated for the SECURE Act, according to Nicole Maholtz, Brentmark’s President and CEO. You can pre-order the software now. It is easy to use and robust, allowing you to what-if different scenarios easily.
It’s Brand New
A lot has been written about the SECURE Act already, even though it was signed into law just weeks ago.
As a result, I’d like to emphasize that it’s a very good idea to talk with your accountant or tax lawyer before acting on the SECURE Act.
Taking that step is important. RMDS trigger income taxes and RMDs not taken on time trigger tax penalties. Don’t cut corners. Double and triple check your particular situation with your accountant before taking any action (or inaction) based on the SECURE Act.
If you reached out to me about whether you can skip or cancel scheduled RMDs based on age 70 ½ now that the SECURE Act is effective, the answer goes back to the pivotal birthday: only those who were born after June 30, 1949 are able to take advantage of the new age 72 RMD rule.