The SECURE Act extended the beginning date for required minimum distributions (RMD) for retirement account owners, including those who own Traditional IRAs. But it is RMD as usual otherwise.
The Setting Every Community Up for Retirement Enhancement (SECURE) Act – Division O of the Further Consolidated Appropriations Act, 2020 (H.R. 1865), includes many changes that affect how retirement plans, including IRAs, must be managed. One of those changes is the deadline by which required minimum distributions (RMD)s must begin from IRAs. Let’s review how these changes affect owners of Traditional IRAs.
Owners of Traditional IRAs, SEP IRAs and SIMPLE IRAs- collectively referred to as Traditional IRAs for the purpose of this article- must start taking RMDs by their required beginning date (RBD) and continue for every year thereafter.
While the first RMD must be taken by the Traditional IRA owner’s RBD; all subsequent RMDs must be taken by December 31 of the year for which they are due.
Failure to take RMDs by the applicable deadline, will result in the Traditional IRA owner owing the IRS a 50% excess accumulation penalty on any RMD shortfall.
Roth IRA owners are not subject to RMDs.
72 is the new 70 ½- New RMD Start Date
For an IRA owner who reached age 70 ½ by December 31, 2019, the first RMD is due for the year that person reaches age 70 ½; and the RBD is April 1 of the year that follows the year of reaching 70 ½. Such an individual is therefore already required to start taking RMDs and must continue.
For an IRA owner who reaches age 70 ½ after December 31, 2019, the first RMD is due for the year that person reaches age 72, and the RBD is April 1 of the year that follows the year of reaching age 72. Such an individual will not be subject to the RMD rules until reaching age 72.
1949 and after
The SECURE Act Gives Some A 2-Year RMD Break
IRA owners who were born during the first 6 months of 1950 get a two-year RMD-break under the SECURE Act, which allows them to start RMD 2 years later than they would have been required to under Pre-SECURE Act rules.
Born in 1950
For an average IRA balance of $100,000, this means not having to take (what would have been) RMDs of about $7,500 for 2020 and 2021- assuming a rate of return of about 5%- allowing for the opportunity of continued tax-deferred growth on those amounts.
Caution: The RMD Formula Has Not Changed
The RMD formula has not changed. This means, that when calculating an RMD for a year, the following factors must be used:
- The December 31 fair market value (FMV) for the year that precedes the year for which the RMD is being calculated.
- The Distribution period based on the age of the IRA owner as of December 31 of the year for which the RMD is being calculated. And,
- The RMD table that is used to obtain the Distribution Period used in the RMD calculation. The distribution period is determined by using Table III (Uniform Lifetime Table) in Appendix B of IRS Publication 590-B. Or, in the case of an IRA owner whose spouse is more than 10 years younger than the IRA owner, and is the sole primary beneficiary of the IRA- Table II (Joint Life and Last Survivor Expectancy).
2020 RMD Calculation Example
Note: The IRS has issued Proposed Regulations to change the RMD tables for 2021 and after. Until those regulations are finalized, RMD calculations will still be done using the current RMD tables.
There Is A Fix For RMDs That The SECURE Act Converted to Non-RMDs
An IRA custodian that held a Traditional IRA on December 31, 2019 must send an RMD notice for 2020, to any Traditional IRA owner who is required to take an RMD for 2020. The RMD notice must inform the IRA owner that an RMD must be taken for 2020, and include the calculated RMD amount or an offer to calculate the RMD upon request.
Had the SECURE Act not become law, such an RMD notice would have been required for Traditional IRA owners who reach age 70 ½ in 2020, by January 31, 2020. But, as a result of the SECURE Act, RMD notices must not be sent to Traditional IRA owners who reach age 70 ½ in 2020.
However, because these RMD notices are designed and scheduled in advance, requiring extensive systemic changes to prevent distribution in some cases, some might still be sent to IRA owners who reach age 70 ½ in 2020.
As a result, there are likely Traditional IRA owners who reached age 70 ½ in 2020, but took what they thought were 2020 RMDs, only to find out that because of the SECURE Act, those distributions are optional. Such a dilemma could be caused by these technically inaccurate RMD notices; and because some of these IRA owners were unaware that, as a result of the SECURE Act, they are not subject to RMDs until they reach age 72.
Thankfully, there are fixes for these inaccurate notices and non-RMD amounts.
Fix For The IRA Custodian
On January 27, 2020 the IRS issued Notice 2020-6, in which they provide relief for IRA custodians who send out RMD notices for 2020, when the Traditional IRA owner is not subject to RMDs for 2020. Under this relief provision, the IRS will not consider the RMD notice to have been “provided incorrectly”, if an offending IRA custodian notifies affected Traditional IRA owners, no later than April 15, 2020, that no RMD is required for 2020.
Fix For The IRA Owner
A distribution is generally required to be included in the IRA owner’s income for the year in which the distribution is made. There is an exception for amounts that are properly rolled over. Under this exception, the distribution is reported on the IRA owner’s tax return as nontaxable income.
Under this provision, a Traditional IRA owner who took a distribution that was intended to satisfy an RMD requirement, has the option of rolling over the amount- assuming that the amount is eligible to be rolled over.
A rollover is ‘proper’ if it meets certain requirements, including:
- The amount must have been eligible for rollover. While RMD amounts are not eligible for rollover, that rule would not prevent a rollover of these 2020 distributions for those who reach age 70 ½ in 2020, amounts that are not RMDs under the new SECURE Act.
- For IRAs, the rollover must not break the one-per-year IRA-to-IRA rollover rule. Under this rule, an IRA owner may roll over a distribution from one IRA to another (Roth to Roth, non-Roth to non-Roth) once during a 12-month period. For this purpose, a rollover made from a Roth IRA to another Roth IRA, or from one non-Roth IRA to another non-Roth IRA uses up the one per 12-month limitation for all Roth and non-Roth IRAs.
For example: John received a distribution from his Traditional IRA on July 30, 2019 and rolled over the amount on August 30, 2019. John may not perform any Roth to Roth or non-Roth to non-Roth rollover for the next 12-month period, which began on July 30, 2019. And,
- The rollover must be completed within 60-days of receipt. For IRA owners who took distributions because of the RMD notices they received from their IRA custodians, and missed the 60-day deadline because they were unaware of the new rules, the deadline is extended under IRS Revenue Procedure 2016-47.
Under Revenue Procedure 2016-47, the extension applies if the IRA owner provides the IRA custodian with a written certification of eligibility for the extension, and the IRA owner had not contacted the IRS for an extension for which such request was denied. A sample written certification, and other applicable rules, are included in IRS Revenue Procedure 2016-47.
It’s RMD As Usual- Otherwise
Except for the changes discussed above, it’s business as usual when it comes to RMDs. Traditional IRA owners must still take their RMDs by any applicable deadline, in order to avoid being subject to the excess accumulation penalty. And, care must be taken to ensure that RMDs are accurately calculated, to help ensure that no less than the required amount is distributed.
As with any matter relating to the technical aspects of IRAs, IRA owners should consult with their advisors for assistance with meeting applicable requirements.
Calculator used in article: Brentmark’ s Retirement Distributions Live