RBD/RMD for You; RBD/RMD for Me

The times they are a changin’

PSCA’s most recent annual survey shows that an increasing number of plan sponsors have adopted provisions designed to encourage participants to aggregate/consolidate retirement savings assets and to permit installment payouts that can be fashioned to meet income needs²:

• 46.3% of plans actively encourage participants to roll assets into the plan, some including rollovers after separation, 
• 21% of plans actively encourage participants to keep assets in the plan after separation, 
• 66% of plans allow participants to retain assets after separation, and 
• 54% of plans offer installment payouts. 

The recently approved change to the Required Beginning Date (RBD) and the proposed Required Minimum Distribution (RMD) table has significance for many more plan sponsors and all workers who have yet to reach age 70 ½. Plan sponsors may want to give some thought to the opportunity these changes could offer to participants in terms of account consolidation/aggregation and in fashioning an income in retirement.

Regulatory Change Proposed
On November 8, 2019, the IRS proposed updates to life expectancy tables used to calculate required minimum distributions – effective in 2021.³ The notice provides guidance relating to the life expectancy and distribution period tables that are used to calculate required minimum distributions from qualified retirement plans, individual retirement accounts and annuities, and certain other tax-favored employer-provided retirement arrangements. These regulations affect participants, beneficiaries, and plan administrators as well as owners, beneficiaries, trustees and custodians of individual retirement accounts and annuities. Written comments are due January 7th and a public hearing is scheduled for January 23rd.

Legislative Change Approved
On December 20, 2019, President Trump signed into law the Further Consolidated Appropriations Act of 2020, which included the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE).⁴ SECURE §114 is titled “Increase in age for required beginning date for mandatory distributions.” It raises the required beginning date age from April 1st of the calendar year following the calendar year in which the individual reaches age 70 ½ to April 1st of the calendar year following the calendar year in which the individual reaches age 72. This change applies to individuals who reach age 70 ½ after December 31, 2019.

Interestingly, the changes don’t affect everyone the same way. Compare people born a day apart, July 1st and June 30th. Born on July 1st, your RBD is April 1st of the calendar year that includes your 72nd birthday. Born on June 30th, your RBD is April 1st of the calendar year that includes your 71st birthday. For those who have yet to reach age 70 ½, the RBD (regardless of the day you were born) becomes April 1st of the calendar year that includes your 73rd birthday.

For IRA’s, the 70 ½ RBD traces back to IRA inception as part of ERISA. So, the change in the required beginning date only slightly adjusts for improvements in life expectancy since then.⁵

Therefore a change in the RBD to match the life expectancy change would not be from age 70 ½ to age 72, but from age 70 ½ to age 76 or age 77.

What Does All This Mean?
The changes have a modest impact.

Using a 5% investment return, the change to the life expectancy tables has the potential to increase the nominal dollar amount by about 3%.

For those born in the 2nd half of the year, the change to the required beginning date (a one-year delay) may increase the nominal dollar amount by an additional 2%. So, for those born between July 1st and December 31st who have yet to reach age 70 ½, we’re talking about an approximate 5% difference throughout retirement.

For those born between January 1st and June 30th (a two-year delay), the change in the required beginning date to age 72 may double the increase – a difference of about 7%.

Note that the RBD/RMD requirements continue to apply to Roth 401(k) assets, but not Roth IRA assets. Plan sponsors who encourage account aggregation/consolidation, asset retention and installment payout may want to consider adding Deemed IRA provisions.

We are providing this information to you solely in our capacity as individuals with knowledge and experience in the industry and not as legal advice. The issues presented here may have legal implications, and we recommend discussing this matter with legal counsel prior to choosing a course of action.

This memorandum (email, publication, etc.) was prepared to support the informational needs of the Plan Sponsor Council of America and the American Retirement Association on the issues discussed. If shared, recipients should understand that (1) the memo focuses on the needs of our association and the issues of interest to association members, (2) it is not appropriate nor intended for further, external distribution, and (3) it is not (and you/others should not use it as a substitute for) legal, accounting, actuarial, or other professional advice.

IRS CIRCULAR 230 NOTICE: Any advice contained in this document was not intended or written by the American Retirement Association to be used, and cannot be used by the recipient or any other person, for the purpose of avoiding any Internal Revenue Code penalties that may be imposed on such person [or to promote, market or recommend any transaction or subject addressed herein]. Recipients of this document should seek advice based on their particular circumstances from an independent tax advisor.

¹B. Dylan, 1964, Accessed 12/30/19 at: https://www.youtube.com/watch?v=e7qQ6_RV4VQ
²PSCA’s 62nd Annual Survey, available at: https://www.psca.org/62nd_ASReport
³Internal Revenue Service, Treasury Department, Updated Life Expectancy and Distribution Period Tables Used for Purposes of Determining Minimum Required Distributions, Notice of Proposed Rulemaking, 11/8/19, Accessed 12/30/19 at: https://www.govinfo.gov/content/pkg/FR-2019-11-08/pdf/2019-24065.pdf
⁴Pub. L. 116-94
⁵CDC, Life Expectancy of Males at Age 65.