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New RMD Rule – What You Need to Know

new rmd rule
Key Points
  • The SECURE Act has changed the RMD age from 70 1/2 to age 72.
  • If you turn age 72 on January 1, 2021, you have until April 1, 2022 to make your first distribution.
  • If you turned 70 after June 30, 2019, you do not need to start withdrawing this year.

As you may already know, once you near retirement, you must start withdrawing funds from most retirement plans. Up until the passage of the SECURE Act in December 2019, it was mandatory to start taking these required minimum distributions (RMD) once you reached age 70 1/2. However, thanks to the SECURE Act, the new RMD rule states that mandatory withdrawals do not start until age 72. Here’s an updated guide about everything you need to know about RMDs.

What Are Required Minimum Distributions?

We talked about required distributions in greater detail leading into the end of 2019. You can refer to that article for more information. Briefly, an RMD is an amount you must withdraw from your retirement plan starting at a specific age. For the last 50+ years, that age has been 70 1/2. RMDs are required from almost all types of retirement plan. The major exception is Roth IRAs. You will never be forced to withdraw from that plan, at least for now! Note: Roth 401(k) plans do have RMDs.

The amount you must withdraw from your plan(s) is determined by the IRS life expectancy table. Essentially, your RMD is based on your age and the retirement account balance as of December 31 of the previous year. You must take your distribution before the end of the year. The one exception to this rule if your first withdrawal. You have until April 1 of the following year to take your RMD. Failure to do so will lead to stiff penalties.

New RMD Rule – What Does it Mean for You?

Time! The biggest impact the new RMD rules will have is time. It gives you at least 18 months more to leave your funds untouched. As you know, due to compounding returns, the more money in the account, the harder it works for you. Once you start withdrawing from the account, there’s less money coming in.

It’s important to note that your first distribution isn’t due until April 1 of the following year. If you turn age 72 on January 1, 2021, you have all the way until April 1, 2022 to make your first distribution. Ensuing RMDs must be taken by December 31 each year. Therefore, if you wait until the following April to take your first one, your second will still be due at the the end of that year. It’s generally a smart financial move to take your first RMD before December 31. Taking two in one year will come with a higher tax bill, since withdrawals will be subject to tax.

What If I turned 70 1/2 before the New RMD Rule?

The new legislation went into effect as of January 1, 2020. Therefore, if you turned 70 1/2 anytime during 2019, the old rule is still in effect. If you haven’t done so, you must take your RMD for last year by April. Further, your second RMD will be due before the end of the year.

Good news if you your half birthday didn’t occur until after the new year. You will have no required distribution in 2020! If you turned 70 after June 30, 2019, you do not need to start withdrawing this year. This is because your half birthday will be during the first six months of the year, after the new RMD rule went into effect. Take advantage of the new rule and continue to fund your retirement account(s)!

If for some reason you wanted to get your RMD settled early, there is still ongoing talks about that withdrawal. Stay tuned if you took your RMD when it wasn’t necessary.

Remember, you can start taking penalty-free withdrawals once you reach age 59 1/2. You don’t need to wait until your required beginning date to distribute funds from your retirement plan. Of course, if you don’t need the funds right away, it’s best to let them grow unhindered for as long as you can!

Summary

The ability to wait longer to take your first withdrawal, thanks to the new RMD rules, is one of the great provisions of the SECURE Act. Notice 2020-6 makes this new rule clear. Take advantage of tax-deferred IRA and 401(k) savings as long as you can!

If you have any questions about the new RMD rule, the IRS Notice or the SECURE Act, please reach out to us @ 800.472.0646!

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