SECURE Act: Changes to Required Minimum Distributions (RMDs)

At the end of last year Congress passed the SECURE Act, which had a pretty significant impact on individual retirement accounts. The one change I want to focus on in this brief letter is the impact of the new law on Required Minimum Distributions (RMDs).

If you’re near retirement age, or already retired, you are likely familiar with RMDs. These are mandatory distributions you must take from various tax-deferred IRAs and other qualified plans.

Prior to the SECURE Act, the first distribution was required by April 1 following the year you reached 70.5 years old with each successive distribution required by December 31st of that first year and each year thereafter. The amount of the required distribution is determined by IRS tables based on your age and a couple other factors.

Distributions from the affected accounts are characterized as ordinary income and, therefore, subject to ordinary income taxes.

The SECURE Act increased the beginning date for these mandatory distributions to April 1st following the year you turn age 72. So, the result is that retirees can delay these mandatory distributions for an extra 1-2 years (depending on when age 70 ½ falls within the year).

Some households cannot afford to delay their distributions and must begin taking them immediately upon retirement. However, most of the households I work with truly don’t need the funds from their IRAs at all. The change resulting from the SECURE Act gives retirees and their advisors up to an additional two years to work with and better manage income (and taxes) in retirement.

One of those strategies might be to accelerate distributions from pre-tax accounts even if they are not needed while the retiree resides in a low tax bracket in the early retirement years before social security benefits and RMDs commence.

Another option in lieu of taking a distribution outright is to convert pre-tax IRA monies to a tax-free Roth. This will allow those assets to grow income-tax-free from that point.

These can be powerful strategies considering the contributions (and growth) were likely in relatively high tax years while we can get at least some of the assets out in relatively low tax years. That can be a nice little tax arbitrage opportunity.

I’ll address some other impactful changes resulting from the SECURE Act in future letters.