Midyear checkup on required minimum distributions

On June 30, the SECURE Act change in the age at which RMDs must begin, to 72 from 70½, will be complete, and the confusing half-year era will finally end.

Any IRA owner turning age 72 this year will have a required minimum distribution due for 2021, but the due date for taking that RMD will depend on the half of the year in which they were born.

June 30 is the cut-off date when the transition to the SECURE Act age 72 RMD rule becomes complete. The SECURE Act raised the RMD age for owners of individual retirement account owners and certain retirement plan participants from 70½ to 72, but only for those who turned 70½ in 2020 or later.

The dreaded half-year RMD confusion that has tormented seniors for decades will soon finally end! The best way to explain this to clients is by using their date of birth.

Anyone born after June 30, 1949, falls under the SECURE Act and uses age 72 for beginning RMDs. Anyone born on or before June 30, 1949, stays under the pre-SECURE Act age 70½ RMD rule.

The CARES Act waived all RMDs for 2020, regardless of the individual’s age, adding to the confusion for both clients and their advisers. Plus, there is a difference between the first distribution year and the year in which a person takes their first distribution. They may not be the same.

For example, if someone turns 72 on July 1, 2021, (meaning they were born after June 30, 1949), then 2021 is their first distribution year — the first year in which they are required to take an RMD. But that RMD does not have to be withdrawn until the required beginning date, or RBD, which is generally April 1 of the year following the year the person turns age 72.

So an IRA owner turning 72 on July 1, 2021, or later in 2021, could delay taking the 2021 RMD until April 1, 2022, which is his RBD. Although 2022 is the year the distribution is taken, the RMD is for 2021, the first distribution year.

Anyone who turns 72 on June 30, 2021, or earlier falls under the pre-SECURE Act age 70½ RMD rules. They have technically already passed their RBD even if no RMD was due.

For example, if an IRA owner turned 72 on July 1, 2020, then they would have turned 70½ in 2019, which is prior to the effective date of the SECURE Act change. Their RBD would have been April 1, 2020, but any 2019 RMD delayed until 2020 was waived by the CARES Act. The 2020 RMD was also waived.

For this group (those who were born June 30, 1949 or earlier), 2021 RMDs must be taken by the end of 2021.

By contrast, anyone turning age 72 in 2021 after June 30 will be subject to the age 72 (SECURE Act) rule and will have until April 1, 2022 to take their first RMD. (However, it might pay not to wait until 2022 to take that first RMD since the second RMD (for 2022) would also be due by the end of 2022 bunching two years of RMDs into 2022.)

EXAMPLES

Bill and Amy are married, and both have IRAs.

Bill was born on June 30, 1949. He will turn 72 on June 30, 2021. His RMD for 2021 must be withdrawn by the end of 2021. Since Bill falls under the old pre-SECURE Act age 70 ½ rules, his first RMD would have been for 2019, the year he turned age 70 ½. If Bill did not take any part of that RMD in 2019 because he was planning to wait until 2020 to take it, then it would have been waived by the CARES Act along with his second RMD, which would have been due by the end of 2020. In this case, the RMD Bill will take by the end of this year will be his first, but his RBD was still technically April 1, 2020.

Amy was born a day later, on July 1, 1949. She will turn age 72 on July 1, 2021, so 2021 will be her first RMD year. She has until April 1, 2022, to take her 2021 RMD since it is her first RMD.

Unlike Amy, Bill must take his 2021 RMD by the end of this year since 2021 is not his first RMD year — 2019 was.

Adding to this confusion is the fact that some clients with 401(k) funds who are still working for the company where they have their 401(k) can delay RMDs until the year they retire. (Technically, this rule is only available if the plan allows this, but most do.)

The good news in all of this RMD confusion is that after June 30, all IRA owners reaching age 72 will fall under the SECURE Act and the transition to age 72 will be complete.

But just when you thought this RMD age confusion was over, Congress is considering raising the RMD age to 73 in 2022 under the pending SECURE 2.0 bill, which would start this whole RMD age transition over again! At least the half-year birthday RMD challenge will finally see its last gasp and be gone for good — hopefully never to return.

[More: Congress, stop the madness and eliminate RMDs]

For more information on Ed Slott and Ed Slott’s 2-Day IRA Workshop, please visit www.IRAhelp.com.