Required minimum distributions and the SECURE act
Solid Rock Wealth Management
If you own a qualified retirement account such as an IRA, you are required to start taking money out of the account at a certain age. Up until last year, the age you must begin your Required Minimum Distributions was 70½.
The SECURE Act
The Setting Every Community Up for Retirement Enhancement Act of 2019, better known as the SECURE Act, was approved by the Senate on Dec.19, 2019, and was signed into law on Dec. 20 by President Donald Trump. The bill includes significant provisions aimed at increasing access to tax-advantaged accounts and preventing older Americans from outliving their assets.
Three key parts of the SECURE Act are:
• Many part-time workers will be eligible to participate in an employer retirement plan.
• The age at which IRA owners need to take required minimum distributions was increased from 70½ to 72, and allows traditional IRA owners to keep making contributions indefinitely.
• Most non-spouses inheriting IRAs must take distributions that end up liquidating the account in 10 years.
What are the Required Minimum Distributions?
The IRS requires that you start taking withdrawals from your qualified retirement accounts (Traditional IRA accounts, SEP and Simple IRAs, 401(k) plans and other tax-deferred retirement savings plans like a TSP, 403(b), or TSA) once you reach age 72. (Note — If you began RMDs in the year 2019, even though you may not yet be age 72, you must continue to take them — you can’t pause and resume at 72. The age 72 applies to those who reach age 70½ in the year 2020 or later.)
RMDs are not required for Roth IRAs, but Roth 401(k)s are subject to RMDs. To avoid the RMD on a Roth 401(k) you can rollover your Roth 401(k) to a Roth IRA. Also, if you inherit a Roth IRA, you will have to take RMDs from the inherited account. The IRS won’t allow you to let the money grow tax-free for generation after generation.
When do I have to start making RMDs?
You must take your first RMD the year you reach age 72, but the IRS gives you until April 1 of the year following the calendar year in which you attain age 72 to withdraw that first required distribution.
Each year after that, your distribution must be taken by Dec. 31. If you miss the Dec. 31 deadline, you are subject to a 50 percent tax penalty on the amounts not withdrawn in time.
You don’t have to wait until the end of the year — you can take the withdrawal any time during the calendar year, and you can set it up as monthly, quarterly or annual distributions. You can also have taxes withheld directly from the distributions.
It’s usually most tax-efficient to take your first RMD in the year you reach 72, and not wait until April 1 of the year after you reach 72; if you wait, you’ll have to take two distributions in that second year, and that will likely make your taxable income higher that year. You can calculate the taxes doing it either way and then take the option that will result in the least total taxes over those two years.
How much is the RMD?
The amount of your required distribution is determined by a formula that uses your prior year’s Dec. 31 account balance, and a divisor, which is based on your age. Your age, for these purposes, is your age at your birthday in the year of your distribution. So if you are taking a distribution in 2020, use the age that you become on your birthday that occurs in 2020. Your first year’s RMD will be approximately 4 percent and the percentage rate will go up each year.
Can I rollover my RMD to a Roth?
You cannot roll a RMD to a Roth account or convert a RMD to a Roth. You can, however, take an “in-kind” RMD distribution. To do an in-kind distribution instead of distributing cash from the IRA, you transfer shares of an investment from the IRA to a non-IRA brokerage account.
If you don’t need the money from your RMD and you want to make a charitable contribution, you can direct your RMD to a charity by using a Qualified Charitable Distribution. The amount of your RMD that is a QCD is not included in your adjusted gross income on your tax return. Lowering your AGI can help reduce taxes in many ways.
What if I’m still working?
An exception is made for RMDs on your 401(k) if you are still working. If you are working after age 72 and you are not a 5% or more owner of the business, then you can delay distributions from your 401(k) at the company you work at until April 1 of the year after you retire. (If you have other IRA accounts the RMDs are still required on those.) ❖
— Nolt is the owner of Solid Rock Wealth Management, Inc. and Solid Rock Realty Advisors, LLC, sister companies dedicated to working with families around the country who are selling a farm or ranch and transitioning into retirement. To order a copy of Chris’s book: Financial Strategies for Selling a Farm or Ranch, visit Amazon.com or call Chris at (800) 517-1031. For more information, visit: http://www.solidrockproperty.com and http://www.solidrockwealth.com.