Edward A. Zurndorfer
Those federal employees and annuitants who own traditional IRAs and who became age 70.5 during 2019 or earlier are still bound by the old required minimum distribution (RMD) rules. Those federal annuitants with Thrift Savings Plan (TSP) accounts who turned age 70.5 during 2019 or earlier are still bound by the old TSP RMD rules. All of these individuals have a “required beginning date” (RBD) of April 1 following the year they become age 70.5. The SECURE Act, recently passed into law in December 2019 and taking effect Jan. 1, 2020, changes the RBD but only for those individuals born after June 30, 1949. For these individuals, the RBD is April 1 following the year they become age 72.
However, the SECURE Act does not give individuals born before July 1, 1949, a temporary RMD “reprieve”. These individuals cannot stop their current RMD payments and then resume their RMD payments when they become age 72. As such, anyone who became age 70.5 during 2019 (that is, born between July 1, 1948, and June 30, 1949) has a required beginning date of April 1, 2020.
The transition period between the old and the new RMD rules has created much confusion. The IRS issued Notice 2020-6 in which the IRS specifically confirms that traditional IRA account owners who became age 70.5 during 2019 must take their first RMD no later than April 1, 2020. It is important to take note that if a traditional IRA owner’s RMD is not taken by the required beginning date, he or she will be subject to a 50 percent penalty. If the IRA owner withdraws only a portion of the RMD amount, then the 50 percent penalty is based on the amount not taken.
Notice 2020-6 also emphasizes the need for IRA custodians qualified retirement plan administrators to be fully aware of their 2019 RMD responsibilities. The end result is that two sets of rules will remain in place, all dictated by when an IRA owner was born (namely, before July 1, 1949, or after June 30, 1949). The following example illustrates:
Vincent and Sheila are a married couple and each spouse owns traditional IRAs. Each spouse was born in 1949. Vincent was born in April 1949 while Sheila was born in August 1949. Vincent and Sheila’s required beginning dates will be separated by two years. Vincent will need to take his first traditional IRA RMD no later than April 1, 2020. This is because Vincent became 70.5 in October 2019. Sheila will need to take her first IRA RMD no later than April 1, 2022. This is because Sheila became age 70.5 in February 2020 and she becomes age 72 In August 2021.
Traditional IRA owners and their financial advisers should be vigilant in understanding these new RMD rules and who they apply to. The same rules apply to retired federal employees with TSP accounts. But those TSP participants born before July 1, 1949, and who are still in federal service are not bound by the RMD rules for their TSP accounts until they retire. But if they own traditional IRAs (and/or qualified retirement plans such as 401(k) plans they no longer participate in), then they must take their RMDs from their traditional IRA (and/or qualified retirement plans they no longer participate in) accounts even though they continue in federal service. A solution to taking the traditional IRA and/or qualified retirement plan RMDs would be to transfer their traditional IRA and/or qualified retirement plan monies into their traditional TSP via Form TSP-60 (Request for a Transfer Into the TSP). In so doing, they can temporarily avoid traditional IRA and qualified retirement plan RMD as long as they continue to work in federal service. Once they retire from federal service, their TSP accounts are subject to the RMD rules.
Edward A. Zurndorfer is a Certified Financial Planner, Chartered Life Underwriter, Chartered Financial Consultant, Chartered Federal Employee Benefits Consultant, Certified Employees Benefits Specialist and IRS Enrolled Agent in Silver Spring, MD. Tax planning, Federal employee benefits, retirement and insurance consulting services offered through EZ Accounting and Financial Services, and EZ Federal Benefits Seminars, located at 833 Bromley Street – Suite A, Silver Spring, MD 20902-3019 and telephone number 301-681-1652. Raymond James is not affiliated with and does not endorse the opinions or services of Edward A. Zurndorfer or EZ Accounting and Financial Services. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. While the employees of Serving Those Who Serve are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.