72 is the New 70 ½ - At Least for Required Minimum Distributions
News flash – people are living and working way longer than they used to be! Maybe you’ve already received that memo, now it’s finally landed on the ears of the government. Despite this change in social norms retirement age and requirements have stayed very consistent until now.
Required Minimum Distributions (RMDs): The old way.
Here’s a rundown on the past in case you weren’t fully aware of this rule! Many folks have been planning for retirement by siphoning money into retirement accounts like 401(k) plans or IRAs. This is just good financial management and a way for you to ensure your financial stability and comfortability later in life. Well, in case you haven’t approached this bit yet – a law passed in the 1960s stating that at age 70 ½ you are required to start taking money (calculated distributions) out of those accounts. This often creates a problem for folks that do not need the annual distributions to live on and are being forced to take distributions. They are also burdened with paying the associated tax on the withdrawal. Especially if they are still working, even part-time, this can cause other sources of income to be taxed at a higher rate. Penalties for failing to take your RMD are steep. Today. we face a wonderful problem – people are staying healthy longer and as a result, living and working longer. Meaning the average age of retirement is older than it used to be, but until now, laws haven’t been passed to catch up.
The SECURE Act of 2019: Section 113: 72 is the New 70 ½
A new rule has hit the scene. President Trump signed the Setting Every Community Up for Retirement Enhancement ACT (SECURE) of 2019 into law on December 20, 2019, taking effect on January 1, 2020. This law is raising the age requiring people to start drawing from their retirement savings from age 70 ½ to age 72. This is huge in creating financial stability for our aging population which is a large concern for both the country and individuals. It’s also going to eliminate a ton of confusion. Calculating half years against calendar years and understanding where that nets out in terms of distributions was a large hurtle that’s been eliminated.
Other changes that may impact you:
Changing 70 ½ to 72 for required minimum distributions effects the most amount of people. However, other changes were made at the same time that may impact you depending on your circumstances.
Section 106. Repeal of Maximum Age for Traditional IRA Contributions
Now, if you keep working you can just keep stacking cash into your IRA. This is great for people who are feeling great towards their late career and want to keep working and saving to enhance their retirement.
Section 111. Allowing Long-term Part-time Workers to Participate in 401(k) Plans
This is amazing! Not everyone secures full-time employment throughout their entire career, but everyone should have the option to be planning for retirement.
Section 112. Penalty-free Withdrawals from Retirement Plans in Case of Birth or Adoption
We are all doing our best financially to live our best life now and build security for the future. Big life changes, like having a baby, sometimes makes us need to focus more heavily on the present moment. Now, you’re able to draw from your retirement to support your growing family without getting penalized.
These changes are such a big deal because finally, some of the laws are supporting real-life people in the way they actually need to be supported in 2020 which looks very different than it did in 1960. This is particularly exciting for one of our own – Bob turns 70 this month! We’ve been so lucky to have Bob sharing his personal and professional wisdom with our team and our clients. Now, he will be able to have his retirement reserve intact for two more years!
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