A required minimum distribution (RMD) is the amount of money that must be withdrawn from a traditional, SEP, or SIMPLE IRA account by owners and qualified plan participants of retirement age. For years, plan participants have known about that magic age – 70 ½. Has that changed? How does it affect you?
The SECURE Act (Setting Every Community Up for Retirement Enhancement) was signed into law on December 20, 2019. Requirements for IRS and other plan participants who reached the age 70 ½ or older in 2019 HAVE NOT CHANGED. If you were already taking your required minimum distribution because you had already reached age 70 ½, then you are not going to be affected by the new rules and you cannot stop taking your RMD, or you will incur penalties assessed by the IRS.
As of 2020, plan participants must begin withdrawing from their retirement accounts by April 1 following the year they reach age 72 (prior to 2020, the RMD age had been 70½ years old). So, if your birthdate is AFTER June 30, 1949 – YOU ARE affected by the new rules. The retiree must then withdraw the RMD amount each subsequent year based on the current RMD calculation. Although you can postpone that first distribution until April 1st of the year following the required age (70 ½ or 72), keep in mind that if you do so, you will then be required to take two distributions in that year. For example: If you reached age 70 ½ in 2019, your first withdrawal must be made by April 1, 2020. However, you must also take your 2020 RMD by December 31, 2020. That is the reason most people take the distribution in the actual year they reach the required age. This could be a tax planning opportunity with regard to your own personal tax situation. You will want to discuss this with your tax advisor to be sure you are considering all of the possibilities with regard to other taxable income before making this decision.
If you do NOT take a timely RMD for a particular tax year, you may be subject to a 50% non-deductible excise tax penalty, assessed by the IRS, on the amount you should have withdrawn, but did not. OUCH! That’s a stiff penalty.
If you have multiple IRA accounts, you should calculate the RMD amount for EACH account separately, however, you can choose which account or account(s) to take the actual withdrawal from.
The Secure Act changed the rules for who can make contributions to their IRA’s with regard to age limits for “tax years” beginning AFTER 2019. So the contributions that you will be making for the tax year 2019 have NOT changed. Before the Secure Act, individuals could not make contributions to their Traditional IRA for the year they attained age 70 ½ or older. This age limit has been eliminated for Traditional IRA contributions – however – the requirement that you must have earned income in order to make a contribution remains.
- A child who has not reached the age of majority
- A disabled individual as defined in the tax code Section 71(m)(7)
- A chronically ill individual as defined in tax code Section 7702B€(2) with modifications
- An individual who is not more than 10 years younger than the original owner
How will that affect your tax and estate planning going forward? Are there strategies that you can use to minimize the tax implications of your distributions? Maybe it’s time to review your personal situation and see if changes or careful planning are in order.
As an Enrolled Agent, Certified Tax Planner and Certified Tax Coach – I not only want to help taxpayers pay the LOWEST legal tax possible, I also want to help them better understand their personal tax situation.
Our goal at Lynco Financial and Tax Services, Inc. is to help people KEEP more of what they make and SAVE more of what they keep.
88%?! Still not high enough? Okay. How about 1944-1945 at 94%? Throughout the 1960s, 1970s and until 1980, the highest rate capped out at 70%. It wasn’t until the early part of the 1980s that we saw rates drop to an upper level of 50% for the maximum tax rate. Along came the 1986 tax act and the top marginal rate dropped to 38.5%. Throughout the rest of the 1980s, 1990s and up until today, our maximum tax brackets have ranged from 35% – 39%. So what changed? The spread between the brackets and the levels of income that are taxed at some of the lower rates. For 2019, a married couple can have taxable income up to $321,449 and still be in the 24% tax bracket ($160,724 for a single taxpayer). Now that’s a sweet rate compared to history! Are you planning to maximize your opportunities?
same level each year but not really taking advantage of the tax savings – maybe because you are not itemizing? You have options. Consider either bunching your contributions or using a donor-advised fund.
contribute another $6,000 in catch-up contributions if you’re 50 or older.