How Does the SECURE Act Affect Required Minimum Distributions (RMDs)?

The Setting Every Community Up for Retirement Enhancement (SECURE) Act has raised the age for required minimum distributions from your retirement accounts from age 70 ½ to 72. This allows the principal of the account to continue growth for an additional 18 months without a required distribution.  This minimum distribution requirement applies to 401(k) plans and traditional IRAs. Roth IRAs are excluded from this distribution requirement. Does this delay of 18 months make a difference?  The jury is undecided, so in this article, we will examine the impact using an example.

 

How Were RMDs Calculated Before SECURE?

A required minimum distribution (RMD) is an amount of money you must withdraw yearly from your 401(k) or traditional IRA. Prior to the SECURE Act, RMDs had to be taken out over the life expectancy of the individual beginning at 70 ½. 

The IRS has actuarial tables that determine life expectancy, and has published a  worksheet showing how to compute an RMD. Using this worksheet as a guide, let’s look at a simple example of a taxpayer who has a $1,000,000 IRA on December 31 of the year before he turns 70 ½. 

IRA balance on December 31 of the previous year $1,000,000
Distribution period from the RMD table (see below) for age 70 ½  on  birthday this year 27.4
Line 1 divided by number entered on line 2.
This is the required minimum distribution for this year from this IRA:


$36,496

 

Age Distribution Period Age Distribution Period Age Distribution Period
70 27.4 82 17.1 94 9.1
71 26.5 83 16.3 95 8.6
72 25.6 84 15.5 96 8.1
73 24.7 85 14.8 97 7.6
74 23.8 86 14.1 98 7.1
75 22.9 87 13.4 99 6.7
76 22.0 88 12.7 100 6.3
77 21.2 89 12.0 101 5.9
78 20.3 90 11.4 102 5.5
79 19.5 91 10.8 103 5.2
80 18.7 92 10.2 104 4.9
81 17.9 93 9.6 105 4.5

Each year thereafter, the calculation is repeated using the distribution period for the taxpayer’s age and the account balance at December 31 of the prior year.

 

SECURE's Impact on the Amount of the Initial RMD

The SECURE Act pushes the age of RMDs to 72.  Obviously, there would be 18 months of additional growth in the IRA, but is there any real substantive benefit to postponing RMDs to 72? 

If the IRS continues to use the current life expectancy tables, the RMD at age 72 will actually be larger than under current law. Continuing with the example from above, the taxpayer is now age 72 at the time of the first distribution. Assuming a 7% growth rate, the IRA has had an opportunity to grow an additional 18 months to $1,107,450. 

IRA balance on December 31 of the previous year $1,107,450
Distribution period from the RMD table (see below) for age (72) on birthday this year 25.6
Line 1 divided by number entered on line 2.
This is the required minimum distribution for this year from this IRA

 

$43,260

 

This example illustrates that the additional 18 months of growth, using current IRS life expectancy tables, will result in a larger RMD by almost $6,764.  How does this play out over time?  Let’s assume that our taxpayer passes away at age 85.  


Total RMDs & IRA Balance at Death Under Prior Law

Age IRA Balance Life Expectancy RMD
71 $1,000,000 27.4 $36,496
72 $1,030,949 26.5 $38,904
73 $1,061.488 25.6 $41,464
74 $1,091,426 24.7 $44,187
75 $1,120,545 23.8 $47,082
76 $1,148,606 22.9 $50,157
77 $1,175,340 22 $53,425
78 $1,200,449 21.2 $56,625
79 $1,223,892 20.3 $60,290
80 $1,245,054 195 $63,849
81 $1,263,889 18.7 $67,588
82 $1,280,043 17.9 $71,511
83 $1,293,129 17.1 $75,622
84 $1,302,733 16.3 $79,922
85 $1,308,408 15.5 $84,413

Under the prior law, the IRA balance would have been $1,308,408 at the time of taxpayer’s death at age 85.  The total amount of required distributions over 15 years is $871,535.

Total RMDs & IRA Balance at Death Under SECURE Act

Under the SECURE Act, the IRA balance will be $1,365,061 at death and total RMDs will be $830,607.

Age

IRA balance

Expectancy

RMD

71

$1,000,000

27.4

$             -  

72

      $1,070,000

26.5

                    -  

73

      $1,107,450

25.6

$43,260

74

      $1,138,684

24.7

$46,101

75

      $1,169,064

23.8

$49,120

76

      $1,198,340

22.9

$52,329

77

    $1,226,231 

22

$55,738

78

  $1,252,428 

21.2

$59,077

79

    $1,276,886 

20.3

$62,901

80

    $1,298,964 

19.5

$66,614

81

      $1,318,615 

18.7

$70,514

82

    $1,335,468 

17.9

$74,607

83

    $1,349,121 

17.1

$78,896

84

    $1,359,140 

16.3

$83,383

85

    $1,365,061 

15.5

$88,068

 

Total Impact of SECURE Act

The following table calculates the total difference between prior law and the SECURE Act on total IRA balance at death and total RMDs during life using the assumptions in the example above.

 

IRA balance at death, age 85

Total RMDs during life

Prior law

$1,308,408

$871,535

SECURE Act

$1,365,061

$830,607

Total impact of SECURE Act

Increase of $56,653

Reduction of $40,928

 

Using our example, the SECURE Act provides an increased IRA balance at time of death of $50,821, which benefits the heirs.  The IRA owner would receive $38,271 less in RMDs by beginning withdrawals at 72 instead of 70 ½. 

Benefit to heirs      $56,653
Cost to IRA owner      ($40,928)
Net impact       $15,725
One could argue that the net impact of the postponement of RMDs to 72 is negligible if the pre-tax balance is $1 million. But, what if the pre-tax balance is higher?  If the pre-tax balance is $3 million or greater, then the net impact could be sizeable.  

 

Tax Planning Opportunities In Light of SECURE

Certainly, we don’t want to overlook the opportunities for tax planning that can happen during this 18 months of additional time to withdraw RMDs.  If a taxpayer does not have to increase taxable income by an RMD, he or she can take advantage of tax planning to reduce overall tax liability during low income years.  Some of these actions include: 

Tax strategies to consider with SECUREs change to RMDs

 

Sell appreciated investments

A lower income year is a perfect time to sell appreciated assets. Depending on your income, the long-term capital gain rate will be 15%, or even as low as 0%. You will also want to sell appreciated assets owned longer than a year if you have a long-term capital gain carryover into the current year.   

Convert a Traditional IRA to a Roth

A low income year is the ideal time to convert smaller Traditional IRAs or portions of larger IRAs to Roth IRAs.  The amount you convert will be taxed at the time of conversion, but the Roth IRA will then earn growth tax-free for the remainder of its existence

In summary, the impact of postponing RMDs from 70 1/2 to 72 can be significant when combined with tax planning during that extra 18 months.  If you would like to estimate the impact of the SECURE Act on your IRA account balance and RMDs over your life expectancy, the experts at Willis Johnson & Associates are available to analyze your facts. With years of experience running mathematical analysis on tax planning and estate plans, we have the knowledge and experience you need to continuously evaluate your options and make wise planning decisions for the future. Get to know us and what we offer to support corporate executives, including our focus on supporting you through each stage of life

 

 

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