Seyfarth Synopsis: The recently enacted SECURE Act defers the latest commencement of payment of our retirement benefits from age 70½ to age 72. Why now, why was it ever set to a half-birthday convention, and which half of the population benefits more from this change? Oh, and how is the required minimum distribution (“RMD”) rule tied to the Cuban Missile Crisis? Yes, the Cuban Missile Crisis!!
To answer these questions, we need to look back a little bit into history – all the way back to 1962. It seems that the requirement to commence distribution of our retirement benefits tied to the attainment of age 70½ found its way into law as part of the Self-Employed Individuals Tax Retirement Act of 1962, adopted by Congress in October 1962 and signed by President Kennedy shortly thereafter. For historical context, President Kennedy also was dealing with the Cuban Missile Crisis and the possibility of thermonuclear war at the very same time he was reading and deciding whether or not to sign this new Act. Talk about being able to multi-task!
For those of us wondering why Congress selected our “half-birthday” (age 70½) and not our full birthday (age 70) to determine our RMD, the answer lies in the legislative history of the 1962 Act, which indicates that the half-year convention was adopted “to accord with usual insurance practice which treats the maturity date of an annuity, endowment or life insurance contract as falling on the anniversary date of the policy nearest to the insured’s birthday.” (Remember, back in 1962 pensions providing lifetime income were the predominant form of retirement benefit.)
And for those of us born in the first half of the year, because of the half-year convention of the 70½ RMD, this change to age 72 actually gives us a little extra boost – a 2-year deferral of our RMD date! I’m sorry to tell you that the RMD date for those of you born in the second half of the year is only pushed back one year.
So why change it now? A few reasons seem apparent. Life expectancy has increased over the past 57 years, making it important to be able to stretch our retirement benefits over a longer period of time. Further, back in 1962, the predominant form of retirement benefit was a pension that provided a monthly payment for life. Today the predominant form of retirement benefit is a defined contribution or individual account-type plan, including IRAs. These forms of retirement benefit typically provide for lump sum or partial lump sum distribution options, including scheduled installments, but don’t typically provide for lifetime annuity payment options. As a result, Congress has become increasingly concerned about the ability of workers today to fund a sufficient retirement for themselves. The SECURE Act includes several provisions that reflect this concern, the deferral of the RMD date being just one such provision.
We will be discussing other SECURE Act provisions in later issues.