Q: Could you please elaborate on the legislation signed into law about having until 72 to take your RMD [Required Minimum Distribution]? J
A: As you mention, among the retirement-planning changes in the recently signed Secure Act is raising the age for Required Minimum Distributions to 72 (with a deadline of April 1 of the following year), up from age 70½.
Those who were 70½ or older before Jan. 1 will continue paying their RMDs under current schedules. Those who turn 70½ on or after Jan. 1, 2020 have an extra year and a half before they need to start their withdrawals. By the way, there is no RMD with Roth IRAs.
The age change won’t affect many retirees since they typically start withdrawing well before their RMD date. They need the money to pay bills. The idea behind the RMD is to eventually force savers to tap into their tax-sheltered retirement money — employer-sponsored plans like 401(k)s and traditional IRAs — and pay ordinary income taxes on withdrawals. The RMD calculation is relatively straightforward. You divide your year-end account balance from the previous year by the IRS life-expectancy number based on your birthday in the current year. For ignoring your RMD, you could be hit with a 50% penalty, plus ordinary income taxes on the sum that should have been withdrawn.
The RMD calculation itself isn’t especially complicated, but there are several twists that are head-scratching. For example, if you have more than one IRA, you figure out your RMD from each account first. You can withdraw the total amount from one IRA if you would like, or from several IRAs. It’s your choice. However, if you have multiple 401(k)s, you must take separate RMDs from each account. Go figure.
Retirement researchers have highlighted an unintended benefit of the RMD. The formula offers a simple way to plan on how much to withdraw annually from retirement savings. The problem with retirement-savings plans like 401(k)s and IRAs is it’s difficult to know how much you can safely take out each year. You don’t want to start withdrawing so much that you risk running out of money before running out of years, yet you don’t want to be so conservative that you can’t enjoy the lifestyle you would like.
One formula is to base withdrawals on your RMD. Among its advantages: The RMD guideline is easy to follow and, since withdrawals are based on the market value of assets, the calculation takes into account changing market values. There are many considerations that come into play when it comes to withdrawal strategies. But you have to start somewhere, and the RMD approach is a reasonable option to consider.
Chris Farrell is senior economics contributor, “Marketplace,” commentator, Minnesota Public Radio.