March 18, 2020

Our tax advocates know that investing in an individual retirement account (IRA) can be an excellent way to set money aside for retirement and save on federal income taxes. An important caveat for traditional IRAs is the required minimum distribution (RMD). As the name implies, you must withdraw a minimum amount by a certain date, based on your age. A bill signed into law last year, the Setting Every Community Up for Retirement Enhancement (SECURE) Act, raises the age for the RMD, and removes an obligation for banks to notify their IRA customers of an upcoming RMD date.. The new law took effect almost immediately, which might catch some banks by surprise. The IRS has therefore issued a notice giving latitude to banks that issue incorrect notices in 2020, provided they also issue a correction to those customers.

What Is a Required Minimum Distribution?

With a “traditional” IRA, you can contribute money before taxes up to a certain amount each year, but you must withdraw a minimum amount by a specified date. Prior to the SECURE Act, the Internal Revenue Code (IRC) required an RMD by April 1 of the calendar year following whichever occurs later:  the account owner reaches the age of 70½; or the account owner retires. This can be confusing for many people:

– If a person turned 70 years old on February 1, 2017, they would turn 70½ on August 1, 2017, and their RMD date would be April 1, 2018.
– If, however, they turned 70 on August 1, 2017, then they would turn 70½ on February 1, 2018, and their RMD date would be April 1, 2019.

This might be why the law required banks to notify customers with traditional IRAs of an upcoming RMD. Banks use IRS Form 5498 to show IRA contributions during the year. Box 11 shows whether an IRA owner must make an RMD. Boxes 12a and 12b show the RMD date and amount, respectively. Banks must send these forms out by January 31 of each year.

The SECURE Act of 2019

Congress passed the SECURE Act as Division O of the Further Consolidated Appropriations Act of 2020. It was signed into law on December 20, 2019. Section 114 of the SECURE Act amended the IRC, changing “age 70½” to “age 72.” These changes, the bill says, apply to anyone who turns 70½ after December 31, 2019.

A person who turned 70½ on February 1, 2020 would have been required to make an RMD under the old law by April 1, 2021. Now, their RMD date will be April 1, 2022, based on their 72nd birthday on August 1, 2021.

New IRS Procedures

People who turned 70½ in 2019 must still make an RMD in 2020. Banks therefore must still send notice to those individuals.

The IRS issued Notice 2020-6 in an effort to address confusion over who should and should not receive a notice in 2020. If a bank sends a notice to an individual turning 70½ in 2020, the IRS “will not consider such a statement to have been provided incorrectly,” as long as the bank sends an additional notice by April 15, 2020 informing those people that they do not have to make an RMD this year.

If you have questions about a tax concern, please contact the tax advisors at the Enterprise Consultants Group today online or at (800) 575-9284 to see how we can assist you.