A Fresh Look at Retirement Withdrawal Rules

Strict rules govern the timing of retirement account withdrawals. These rules may change in the near future with a new bill moving through Congress, but meanwhile, here’s what you need to know.

With a series of recent changes, and some possible future modifications, it can be difficult to keep pace with the withdrawal rules on retirement accounts.

To start with, the SECURE (Setting Every Community Up for Retirement Enhancement) Act, which became law on Dec. 20, 2019, made major changes to the required minimum distribution (RMD) rules. If you reached the age of 70½ in 2019, the prior rule applies and your first RMD was due by April 1, 2020. If you reach age 70½ in 2020 or later, you must take your first RMD by April 1 of the year after you reach 72.

For defined contribution plan participants or IRA owners who pass away after Dec. 31, 2019 (with a delayed effective date for certain collectively bargained plans), the SECURE Act requires the entire balance of the participant’s account be distributed within 10 years. There is an exception for a surviving spouse, a child who has not reached the age of majority, a disabled or chronically ill person, or a person not more than 10 years younger than the employee or IRA account owner. The new 10-year rule applies regardless of whether the participant dies before, on, or after the required beginning date.

Your RMD is the minimum amount you must withdraw from your account each year. You generally have to start taking withdrawals from your IRA, Simplified Employee Pension IRA, Savings Incentive Match Plan for Employees IRA, or retirement plan account when you reach age 72. Roth IRAs do not require withdrawals until after the death of the owner.

The IRS also notes that:

• You can withdraw more than the minimum required amount.
• Your withdrawals will be included in your taxable income, except for any part that was taxed before (your basis) or that can be received tax-free (such as qualified distributions from designated Roth accounts).

Whether you have set up or inherited a retirement account, consult with a financial professional to make sure you’re following the rules.

On the Horizon

The House recently passed SECURE Act 2.0 which would raise the age again, from 72 to 75, in graduated stages. For those who prefer to wait, that means more time to let the money grow. But this also may lead to higher tax bills, as more money has to be withdrawn over a shorter period of time.

If retirees find themselves temporarily in a lower tax bracket, it may be advantageous to convert their IRAs into Roth IRAs. They will have to pay taxes, but they may be lower now than later. It’s important to plan well in advance and work with a qualified financial professional to discuss your specific situation and goals. If you have any questions about tax strategies for your retirement or how to best plan for withdrawals, please contact us at (805) 963-7811.