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.
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.
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
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.
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.
Benefit to heirs $56,653 Cost to IRA owner ($40,928) Net impact $15,725
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:
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.
