Changes to Required Minimum Distribution Rules

With the passage of the SECURE Act in December 2019, current and future retirees can expect to see significant changes which are likely to impact their tax planning for retirement. Most notably, perhaps, is the increase in the Required Minimum Distribution (RMD) age from 70 ½ to 72.

For affluent retirees – and soon-to-be retirees – affected by the new RMD age, both the increase in the RMD age and the proposed new life expectancy tables on which individual RMDs are based are a bit of a double-edged sword. Since annual RMDs are simply a calculation of the total amounts in your traditional IRA, 401(k) and/or other employer-sponsored retirement account divided by your remaining life expectancy in years, the proposed revisions to the life expectancy tables appear to be a boon – at first. With more years statistically ahead of today’s 72-year-old retiree than in the past, this RMD calculation will initially be lower than before, leaving a larger portion of your portfolio to grow each year.

Which brings us to the other edge of the sword. All other things being equal, including average annual return, the RMD amount will likely increase over time because of the growth advantage provided by the revised life expectancy table. And failure to withdraw the RMD will incur a 50% penalty of the RMD amount. (For example, failure to withdraw an RMD of $20,000 will result in a penalty of $10,000.) For those expecting to leave a legacy behind for heirs or for charitable purposes, the prospect of losing significant net worth to taxation later in life seems onerous indeed.

So what can high-net-worth individuals do to preserve their legacy and mitigate the risk of account balances being drawn down at disproportionately high rates later in retirement?

Perhaps one of the most obvious solution is Roth conversions. For individuals whose net worth sits predominantly within a traditional 401(k) or other employer-sponsored plan and who have not yet established a traditional IRA, the Roth conversion process might be a good option.    

 Numerous guides for doing Roth conversions are available online. However, since these are written for a broad audience and only you know your exact situation and financial goals, always speak with a reputable financial planner to determine the best way forward for you and your loved ones.

While the change in RMD age and other aspects of the SECURE Act appear problematic to those who haven’t fully assessed the implications for their personal financial situation, Roth conversions and other tactics may possibly help mitigate potential losses of one’s net worth to taxation. For more information, talk to a financial planner today.