By Matt Crisafulli, CFP, EA, August 25, 2020
How does the SECURE Act affect RMDs?
In December 2019, Congress passed the “Setting Every Community Up for Retirement Enhancement Act of 2019” (also known as the SECURE Act) which made major changes to Required Minimum Distributions (RMDs) for both account owners and those who inherit retirement accounts upon the original owner’s passing.
A “required minimum distribution” is the minimum amount account owners must withdraw from their accounts each year and one of the biggest changes that occurred as a result of the SECURE Act passing was delaying the age that retirement account owners were required to take distributions from their retirement accounts.
The old rule required account owners to begin taking withdrawals from their retirement accounts after turning age 70 ½. The new rule pushes that age back to 72, allowing account owners more time to defer taking distributions and paying income taxes on those distributions.
For secondary owners who inherit retirement accounts upon the passing of the first owner, new rules apply for their distributions as well. For retirement account owners who die after December 31, 2019, the SECURE Act requires the entire balance of the participant’s account be distributed within ten years, with these few exceptions:
- A surviving spouse
- A child who has not reached the age of majority
- A disabled or chronically ill person
- A person not more than ten years younger than the account owner
Prior to the passing of the SECURE Act, those who inherited a retirement account had the ability to stretch out their withdrawals over their own life expectancy, which could result in significant growth and tax deferral if the inherited account owner was a lot younger than the original account owner. The new 10-year rule applies regardless of whether the original account owner dies before, on, or after, the required beginning date (which is now age 72) and greatly reduces the often used benefit of stretching out IRA withdrawals over a longer period of time.
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Matt Crisafulli, CFP, EA is a partner at ACap Advisors & Accountants, LLC in Los Angeles, CA.
