There are some big changes taking place with your IRA in 2020, and they center on RMD, or required minimum distributions.
The government placed RMDs on retirement accounts to limit the tax benefit you can receive from these types of accounts. Basically, they wanted to prevent you from never paying taxes on the money you place in the accounts. So, eventually the government forces you to take out a portion of the money in your IRAs. And then they tax it. Of course, you can start withdrawing (without penalty) money from an IRA at age 59 ½, but the withdrawal isn’t mandated until several years later.
Also, RMDs only apply to traditional IRAs, where pre-tax dollars are placed into the accounts. Since Roth IRAs uses after-tax dollars, there are no RMDs.
Now that you have a basic understanding of RMDs, what are the big changes? There are two of them.
1. The age at which you must start taking RMDs has been bumped from 70 ½ to 72. For those who turned 70 ½ in 2019, the old rules still apply. But for those who did cross the 70 ½ threshold in 2019, your RMDs don’t start until the year in which you turn 72. At that point, you must take an RMD before the 1st of April the following year.
2. There is now a 10-year provision IRAs inherited by a non-spouse beneficiary. For IRAs inherited prior to 2020, a non-spouse beneficiary could stretch out distributions from an IRA over a lifetime. That lifetime stretch has gone away. For IRAs inherited after December 31, 2019, by a non-spouse beneficiary, there is a 10-year provision. This means that funds in the inherited IRA must be distributed within 10 years. For those thinking through estate planning, this may be a significant adjustment.
So, those are the two big RMD changes for your IRAs, neither which should cause you to reconsider saving for retirement. Keep going after Milestone 6, consistently setting aside 15% of your gross monthly income into a retirement account. Don’t stop preparing for retirement so that your retirement years can be some of the most fruitful, generous years of your life.