SECURE Act Changes to RMD Rules: Client Impact

SECURE Act Changes to RMD Rules: Client Impact

Congress certainly enjoys a mouthful and we aren’t just talking about their appetite for spending, to say nothing of insatiable borrowing.

In the case under scrutiny, we’re talking about the December 19 passage of a major piece of domestic legislation, the Setting Every Community Up for Retirement Enhancement Act, known to simple mortals as the Secure Act.

In this case, the grand naming convention may be deserved, because the SECURE Act’s changes are sweeping. The Act is intended to open access to certain classes of retirement accounts, like 401(k) plans, to Americans previously excluded from participation. Part-time workers, who form a large portion of the workforce, will now be able to better plan for their retirements.

The SECURE Act also aims to help the elderly assure they won’t outlive their retirement incomes, a concern in an age of longevity and better health, two blessings that nevertheless come with attendant high costs.

The new legislation introduces myriad changes, with one of particular importance to seniors and their financial advisors. The required minimum distributions rules, which apply to holders of many types of qualified retirement accounts, including IRAs, the 401(k), 457 plans and many others, have been adjusted, raising the age for the first RMD.

In the old regime, RMDs began at age 70½, and odd barrier that led to complication and confusion, often with attendant penalties. Under the SECURE Act, starting this year, qualified account holders must take their distributions starting at age 72. The final date for taking the RMD remains unchanged at April 1 in the year after a person passes the age deadline.

Unfortunately, if an account holder turned 70½ in 2019, the old, pre-SECURE Act rules will continue to apply. Additionally, qualified charitable distributions, or QCDs, must still be taken from IRAs starting from age 70½. It wouldn’t be the government if a few booby traps weren’t laid out along an otherwise clearer path.

One key factor has not changed under the SECURE Act: life expectancy tables. The IRS has been making noises about changing life expectancy factors to account for the longer lives that Americans can expect. It isn’t yet clear when the IRS will release its new calculations, but observers expect them in time for the new tables to go live starting in 2021.

Advisors should note a curiosity in the SECURE Act that will have a major impact on when clients must take their first RMD. It works like this: people who reach age 70 in the first half of the year (ending 30 June) will reach 70½ in the second half of the same year. That means they must take their first RMD two years later, at age 72. If a person reaches 70 in the year’s second half, they’ll invariably turn 72 in the next year – that is, in the same year they turn 71. This means they’ll enjoy only a one-year gap before their first RMD.

Many retirees are unlikely to notice the changes wrought by the SECURE Act – indeed, most welcome the RMD as needed income. For clients who do wish to wait, Roth Conversions are a good way to increase income while smoothing out the tax implications.

Now is a good time to review your client list and communicate the new rules to customers – we hope you’ve already done so, but there’s still time, in any case. Clients who wish to delay RMDs should be presented with the benefits of Roth Conversions, because for them, time is of the essence.

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For more information, please read: How Required Minimum Distribution (RMD) Changes Under The SECURE Act Impact Retirement Accounts |

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