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"Transitioning to new RMD rules thanks to the SECURE Act" by Julie Jason

As anticipated, the president signed the SECURE Act into law on Dec. 20. As a result, beginning in 2020, RMDs will be subject to some new rules.

One good thing about the SECURE Act is the move away from age 70 1/2. You’ll see some of the complications of using age 70 1/2 as a measuring date below.

Let’s go through one of the major RMD changes. A subsequent column will go into more details.

If you are the owner of a traditional tax-deferred individual retirement account, you must begin withdrawing money from that IRA when you reach a certain age.

Because of the passage of the SECURE Act, the timing of your first RMD will be age 72, not 70 1/2. That raises questions about the transition from 70 1/2 to 72.

Let’s break this down based on birthdays: 1) born before 1949; 2) born between Jan. 1, 1949, and June 30, 1949; 3) born between July 1, 1949, and Dec. 31, 1949; and 4) born after 1949.

1) Born before 1949?

If you are already taking RMDs because you were born before 1949, the SECURE Act’s age change does not affect you. Keep taking your RMDs as usual.

2) Born in 1949 between Jan. 1 and June 30?

If you were born between Jan. 1 and June 30, 1949, the SECURE Act’s age change does not affect you. That is because you turned 70 1/2 in 2019; you are subject to RMDs calculated on your 12/31/2018 IRA balances. For your first RMD only, you have the option of taking the withdrawal either before the end of 2019 or before April 1, 2020, the “required beginning date” (or RBD). No matter which option you choose, you will need to take your 2020 RMD based on your 12/31/2019 balance before Dec. 31, 2020.  

3) Born in 1949 between July 1 and Dec. 31?

Sticking with 1949 birthdays, if you would have turned 70 1/2 in 2020 (because your birthday is between July 1, 1949, and Dec. 31, 1949), the SECURE Act does apply to you. Your first RMD is now due in the year you turn 72, which will be in 2021. Your first RMD will be based on your 12/31/2020 balances.  

4) Born after 1949?

Wait until the year you turn age 72 to take your first RMD. You don’t have to worry about the complexities of figuring out age 70 1/2 requirements for any IRA or tax-deferred account matter.

This discussion has to do with rules that govern the owner of a traditional IRA. We’ll talk about 401(k)s and Roth 401(k)s in a future column, as well as rules affecting inherited retirement accounts.  

As we discussed in the past, the annual RMD is not optional. It is mandated by law. And there are heavy financial penalties for failing to take the RMD on time. The penalty (an excise tax) is 50 percent of the amount you should have withdrawn. For example, if you missed your 2019 RMD of $10,000, you owe the U.S. Treasury $5,000.

While these resources are not updated yet for the SECURE Act, the bible on withdrawals is IRS Publication 590-B, “Distributions from Individual Retirement Arrangements (IRAs),” at https://www.irs.gov/pub/irs-pdf/p590b.pdf.