RMD Transition from Age 70½ to 72 Not Without Its Complications
By Mike Rahn, CISP
It’s hard to overstate the significance of retirement savings changes in the Setting Every Community Up for Retirement Enhancement (SECURE) Act, part of the Further Consolidated Appropriations Act (FCAA), 2020, signed into law in December 2019. Tax-qualified retirement savings arrangements from IRAs to virtually every type of employer-sponsored retirement plan will see changes, large, small, or both.
One change that will affect all tax-qualified retirement savings arrangements is the increase from age 70½ to age 72 of the onset of required minimum distributions (RMDs), those mandatory annual payments that—unless they are Roth IRA amounts—must begin their decumulation or distribution phase. Again, with the exception of Roth IRA amounts, most represent potentially taxable income. This change is effective for 2020 and later years.
Federal lawmakers who drafted the SECURE legislation appear to have recognized that many who have these accounts are living longer on average—something also reflected in a recent Treasury Department proposal to update life expectancy tables for greater longevity. In addition, many Americans are choosing to remain employed longer, and—if receiving income from full- or part-time jobs—may have less immediate need for the retirement assets they have accumulated in IRAs or employer plans.
The Treasury Department is empowered to incrementally adjust life expectancy tables, but then only to the extent that there have been measurable changes in life expectancies. But “an act of Congress” could—and did—move the age of RMD onset more substantially to age 72. (It is worth noting that another retirement bill introduced in 2019 proposed moving it to age 75.)
Who Does This Change Affect?
Perhaps to minimize confusion, Congress chose not to grant those already of RMD age the ability to interrupt or cease taking these distributions. Those who turned age 70½ in 2019 or a prior year will commence or continue RMDs uninterrupted. Those who turn age 70½ in 2020 or a later year will not have an RMD obligation until the year they attain age 72.
The ability to delay the first payment until as late as April 1 following the first RMD year remains. For example, an IRA owner reaching age 72 in 2020 could delay his first RMD payment to as late as April 1, 2021. If doing so, however, he would be required to take his second RMD payment by December 31, 2021, and future RMDs by December 31 of each subsequent year.
Does This Change Affect Plans Differently Than IRAs?
Employer-sponsored retirement plans—other than those with IRAs as their funding vehicles (i.e., savings incentive match plan for employees of small employers (SIMPLE) IRA and simplified employee pension (SEP) plans)—may permit workers employed after normal RMD age to wait until leaving employment before beginning RMDs. (This option is not available to those who own more than 5 percent of the company sponsoring the retirement plan.)
For eligible workers employed after age 72, their first RMD year will be the year of retirement. They will be permitted to delay that first RMD if taken from the employer plan until as late as April 1 of the following year. But any distribution in the retirement year must be considered part of that year’s RMD, and ineligible to be rolled over to an IRA or another employer’s plan.
Transition Relief for IRA Reporting
In 401(k) and other employer-sponsored retirement plans, it is the plan administrators’ compliance responsibility to ensure that all participants properly take their RMDs. IRA custodians, trustees, and issuers, however, do not have that level of fiduciary responsibility, but they are required to inform IRA owners by January 31 each year if an RMD is required to be taken for that year. An IRA owner may choose to satisfy the RMD with a distribution elsewhere, but the notification requirement cannot be avoided.
Because of the timing of this legislation’s enactment—December 20, 2019—IRA processing and reporting systems would have been programmed to inform account owners turning 70½ in 2020 that an RMD was required to be taken for this year. This would be incorrect, since these individuals are not required to begin receiving RMDs from their IRAs until they reach age 72. Importantly, it would constitute a reporting failure by the IRA custodian, trustee, or issuer.
In January of this year, the IRS issued Notice 2020-6, informing these IRA administrators that they would be granted relief for having provided this incorrect information to IRA owners; if, that is, by April 15, 2020, they informed those affected IRA owners that no RMD was due for 2020.
More Relief Hoped For
Not addressed in Notice 2020-6 was whether an IRA owner (or a plan participant) who received a 2020 distribution under the assumption that it was required would be granted special relief to return the amount to an IRA or to an employer plan, as an eligible rollover. Only 60 days is generally allowed for completing an indirect rollover. A clarification received from an IRA custodian in April could easily be beyond 60 days from when the “RMD” had been distributed. There is also a one-per-12-month IRA-to-IRA rollover limitation that could affect those who had executed another rollover in the prior 12 months.
The IRS did state in Notice 2020-6 that the agency is “considering what additional guidance should be provided … including guidance for plan administrators, payors, and distributees if a distribution to a plan participant or IRA owner who will attain age 70½ in 2020 was treated as an RMD.” This has generated some hope that the IRS will see the equity in allowing a taxpayer to restore such an amount to an IRA or other qualified account, given the misleading information she may have received from their IRA administrator.
