The Internal Revenue Service just issued Notice 2020-06, which provides guidance to individual retirement account custodians on reporting 2020 required minimum distributions (RMDs) in light of the changes made to Internal Revenue Code Section 401(a)(9) by the Setting Every Community Up for Retirement Enhancement (SECURE) Act.
Lifetime RMDs from retirement accounts must commence once taxpayers reach their required beginning date (RBD). This is done to ensure that individuals spend their retirement savings during their lifetime and don’t use their retirement plans for estate planning purposes to transfer wealth to beneficiaries. The SECURE Act changed an individual’s RBD to reflect the fact that individuals are living longer. The RBD was changed from April 1 of the year after an individual turns age 70½ to April 1 of the year after an individual turns age 72. (A taxpayer who isn’t a 5% owner in the company sponsoring his retirement plan and continues to work can delay his RBD until he retires.) This change affects anyone who hasn’t already reached age 70½ by the end of 2019. As a result of this change, IRA owners who attain age 70½ in 2020 won’t have an RBD of April 1, 2021, and, accordingly, no 2020 RMD.
IRA custodians are subject to certain reporting provisions, put in place to assist taxpayers in complying with the RMD rules. These requirements include filing Forms 5498 and supplying IRA statements to IRA owners. If an RMD is required for a calendar year, the IRA custodian must provide a statement to the IRA owner by Jan. 31 of the calendar year regarding the RMD. This statement must inform the IRA owner of the date by which the RMD must be distributed and either provides the amount of the RMD or offers to calculate that amount on request. In addition, if an RMD is required for a calendar year, the IRA custodian must indicate that an RMD is required on Form 5498 (IRA Contribution Information) for the immediately preceding year (that is, on a 2019 Form 5498 for a 2020 RMD) in accordance with the instructions for Form 5498 (Notice 2002-27).
Specific to this year, if an IRA owner has an RMD due for 2020, the IRA custodian must file a 2019 Form 5498 by June 1, 2020, and indicate by a check in Box 11 that an RMD is required for 2020. The IRA custodian may also choose to provide further information in Box 12a (RMD Date) and Box 12b (RMD Amount). Furthermore, if an IRA owner has an RMD due for 2020, the custodian must furnish the above-mentioned RMD statement to the IRA owner by Jan. 31, 2020.
Because the age for starting RMDs has changed to 72 in 2020, an IRA statement shouldn’t be sent to IRA owners who will turn 70½ in 2020 because a 2020 RMD isn’t required for such owners. However, the IRS recognized the short amount of time that custodians have had to change their systems since the SECURE Act became law. Accordingly, under Notice 2020-06, if a custodian provides an RMD statement to an IRA owner who turns 70½ in 2020, the IRS won’t consider such a statement to have been provided incorrectly, but only if the IRA owner is notified by the custodian no later than April 15, 2020, that no 2020 RMD is actually required. In addition, for IRA owners who attain age 70½ in 2020, the 2019 Form 5498 shouldn’t include a check in Box 11 or entries in Box 12a or 12b.
The SECURE Act didn’t change the RBD for IRA owners who attained age 70½ before 2020. To reduce misunderstanding among IRA owners, the IRS encourages financial institutions to remind IRA owners who turned age 70½ in 2019, and have not yet taken their 2019 RMDs, that they’re still required to take those RMDs by April 1, 2020.
The Notice indicates that the Department of the Treasury and the IRS are considering what additional guidance should be provided with respect to the SECURE Act, including guidance for plan administrators, payors and distributees if a distribution to a plan participant or IRA owner who will attain age 70½ in 2020 was treated as an RMD.