Yesterday, I began a 3-part series about some of the questions people are asking about recent federal legislation. Specifically, those questions are:
- Was Obamacare really declared unconstitutional by the Supreme Court?
- Were the required minimum distributions (RMDs) at age 70 ½ from your retirement plan really eliminated?
- And how about the threshold for writing off medical expenses–was that also tossed away?
I answered question #1 in yesterday’s blog post and will answer question #3 in tomorrow’s blog post. Here’s my answer about the changes the SECURE Act brought to required minimum distributions (RMD).
The Setting Every Community Up for Retirement Enhancement (SECURE) Act went into law in December 2019 as part of the Further Consolidated Appropriations Act of 2020. The SECURE Act deals primarily with retirement plans–and a number of changes to those plans, especially to qualified plans.
A qualified retirement plan is established with money that has not been taxed. Examples include an employee depositing money into an IRA or 401(k) with salary before payroll taxes are deducted, or an employer depositing matching funds.
The IRS has long required individuals to begin withdrawing funds from qualified accounts at a specific age. Why? So it can collect taxes on that money! If a person establishes an IRA, or begins contributing to a 401(k) at age 40, the government doesn’t collect any taxes on the funds in these qualified plans until the account holder begins withdrawing the funds. A person can easily build an account with hundreds of thousands of dollars over a lifetime of working.
The required beginning date of a retirement account is the date the account holder MUST begin making withdrawals–withdrawals that will be taxed by the IRS. These withdrawals are called required minimum distributions, or RMDs. For people who turn age 70 ½ on or before January 1, 2020, RMDs must be taken no later than April 1 of the year after the account holder turns age 70 ½.
For example:
- If my 70th birthday was March 3, 2018, I turned 70 ½ on September 3, 2018. I had to make my first RMD no later than 4/1/2019.
- If my 70th birthday was October 9, 2018, I turned 70 ½ on April 9, 2019. I have to make my first RMD no later than 4/1/2020.
Per the SECURE Act, the required beginning date was changed to 72 because many people are working longer. But it only changed for those who turn 70 ½ after 1/1/2020. People who turn 70 ½ after 1/1/2020 must begin their RMDs no later than April 1 of the year after they turn age 72. For example, if my 70th birthday is February 21, 2020, I will have to take my first RMD by April 1 of 2023 because that is the year after I turn age 72.
One of the issues concerning this age change is the fact that some people won’t have to make any RMDs in 2020. Here’s a Forbes article that explains this issue in more detail.
One final thing about RMDs. Before the SECURE Act, individuals could not begin a traditional IRA after age 70 ½, nor could they make contributions to it after that age. Now, so long as a person is working and earning income, he or she can open and make contributions to a traditional IRA at any age.
Check back tomorrow for the third and final part of this blog post series: the medical expense deduction threshold.