If you are 70 or about to hit that milestone, you’ve just gained more options in managing your retirement income.
As of January 1, 2020, you can now delay taking required minimum distributions (RMDs) from retirement savings until age 72. Previous rules required distributions after age 70.5 from IRAs or employer-sponsored retirement plans such as 401(k), 403(b) and 457(b) plans.
This change is one of many major provisions in the SECURE (Setting Every Community Up for Retirement Enhancement) Act. Delaying withdrawals lets your retirement savings continue to grow a bit longer, which can boost your overall retirement savings. The SECURE Act also removed the contribution cutoff age of 70.5, so you can keep making pre-tax contributions at any age as long as you are still working. (Roth IRAs have no distribution age requirements, so they can also keep growing.)
No 2020 RMDs
On top of this change, the CARES (Coronavirus Aid, Relief and Economic Security) Act suspended all RMDs for 2020. Waiving RMDs provides flexibility and tax relief to retirees in a tough economy and allows them to give their portfolios a chance to recover from recent market shocks.
Note that in the first year after you turn 72, you have until April 1 of the following year to draw your first RMD. However, if you delay your first RMD, you must take one for the current tax year by December 31, so you’ll face taxes for two withdrawals in one year.
If you already took an RMD in early 2020 and would prefer not to, you can roll over the distributed funds into a tax-deferred IRA, as long as you do so within 60 days of taking the disbursement. Note that your plan provider is not obligated to inform you of this temporary rollover provision.
Impact for Survivors
Delaying RMDs leaves savings intact and growing for 18 months, which may provide more retirement income for a surviving spouse. However, another provision of the SECURE Act changes the payout for non-spouse beneficiaries. Those who inherit retirement assets from someone who dies in 2020 and beyond must now withdraw all funds over a 10-year period, rather than stretching distributions over their remaining lifetime. This means higher payouts and more significant tax burdens.
The 10-year payouts to beneficiaries begin the year after the account owner dies. Spouses, minor children, individuals with disabilities and beneficiaries who are up to 10 years younger than the account owner are exempt from the 10-year maximum payout rule.
Individuals can still direct retirement withdrawals to their favored causes with a Qualified Charitable Distribution (QCD) at age 70.5; the age threshold did not increase to 72. However, in 2020 a QCD cannot be used to offset a taxable required distribution since none is required. The tax benefit of the QCD deduction is also offset by the amount of any pre-tax retirement contributions made in that year.
Economic conditions are significantly changing current income, savings and the retirement picture for many. With these relaxed distribution requirements and new rules on inheritance, it’s a good time to contact us and revise your plans to fit your needs.