If you’re an IRA holder over the age of 70, you know all about the obligatory hassle of taking an RMD (required minimum distribution). You’re familiar with the routine: come January, your retirement plan administrator sends out a letter reminding you to take the annual distribution. Failure to do so will result in a 50% IRS penalty of the amount you didn’t remove.
But this year, your financial institution may have sent out misinformation. In fact, you may not need to take an RMD in 2020.
And here’s why:
New Rules, New RMD Age
The SECURE Act, which was signed by the President in December, changed the RMD age from 70 1/2 to age 72. This amendment is effective for RMDs after December 31, 2019, if the individual turns 70 1/2 after that date. As a result, if you turn age 70 1/2 in 2020, your new required beginning date is April 1, 2021. So, you will not have to take an RMD in 2020. An added benefit of the changing rules is, IRA holders no longer need to determine when they turn 70 1/2.
Furthermore, the old RMD rules have been in place since retirement plans were created in the early 1960s. The plans were never changed for the increase in life expectancy, which the SECURE Act has resolved to do.
Financial Institutions Won’t be Penalized
The IRS doesn’t plan on penalizing financial institutions for sending out the wrong information. Instead, they have given financial institutions until April 15, 2020, to notify account holders that no RMD is due for 2020 (if turning 70 1/2 this year).
Additional Impacts of the SECURE Act
The SECURE Act was passed in late Dec., 2019, and impacted IRA holders in many ways. Along with the increased RMD age, the SECURE Act repealed the prohibition on contributions to a traditional IRA for individuals age 70 1/2.
There were also a number of “adverse” impacts, primarily with the elimination of the Stretch IRA. This new provision was initiated to raise revenue, yet received backlash from IRA holders who structured their estate and tax planning around the option of using the Stretch IRA.
When to Take Your RMD
For individuals age 70 1/2 in 2019
If you turned age 70 1/2 before Dec. 31, 2019, you must take your first RMD by April 1 of 2020, if you haven’t already done so. Furthermore, you must take your second RMD, due for 2020, before Dec. 31, 2020. Unfortunately, you’re unable to take advantage of the new RMD age.
For Individuals Age 70 1/2 in 2019
If you are turning age 70 1/2 in 2020, you do not have to take a required minimum distribution this year. Your first RMD will be when you reach age 72. Therefore, your first RMD must be taken by April 1, 2023. Note: if you turned age 70 in 2019 (but not 70 1/2), your first RMD will be due April 1, 2022 (the year you turn age 72).
This new rule applies to all IRA owners, including Self-Directed IRAs, SEP IRAs and SIMPLE IRAs. However, if you have already taken your first distribution, according to Notice 2020-06, the Treasury Department and IRS are figuring out what will be done with the money, as the RMD was not mandatory for those turning age 70 1/2 in 2020.