Nerd's Eye View blog

Coordinating QCDs With Post 70 1/2 IRA Contributions Under The SECURE Act

January 22, 2020 07:16 am 8 Comments CATEGORY: Retirement Planning

In December 2019, the Setting Every Community Up For Retirement Enhancement (SECURE) Act was passed into law, making many substantial updates to long-standing retirement account rules. While one rule repealed the maximum age for making Traditional IRA contributions (as now IRA owners beyond age 70 1/2, and in fact of any age, are allowed to contribute to their accounts, as long as they have compensation [generally earned income] to contribute), another such rule was created that, in essence, limits the amount of Qualified Charitable Distributions (QCDs) a Traditional IRA account holder can make, depending on the cumulative amount of those post 70 1/2 deductible contributions claimed.

Qualified Charitable Distributions (QCDs) are tax-efficient methods of making charitable donations with funds from a Traditional IRA (or inherited Traditional IRA). Essentially, an account holder (or beneficiary) age 70 1/2 or older can transfer up to $100,000 each year directly to charity. While the distribution from the account can count toward the account holder’s annual RMD, it is not included as Adjusted Gross Income (AGI), and thus does not need to (and cannot) be included as a charitable gift itemized deduction, making it a ‘perfect’ pre-tax donation.

With the passage of the SECURE Act, however, IRA account owners must now reduce their intended QCDs by any contribution amounts made into their IRAs after age 70 1/2 (the age cap in place to make IRA contributions before passage of the SECURE Act), to the extent they have not already been used to reduce their QCD. In other words, IRA contributions made after age 70 1/2 cannot be turned around to be used as QCDs… and the rules effectively require a “LIFO” treatment that ensures post-age-70 1/2 contributions will first and foremost be used to reduce future QCDs.

Going forward, there are four steps used to calculate allowable QCDs (to account for the potential impact of post-age-70 1/2 contributions):

Determine current-year distributions made and intended to be counted as QCDs;
Calculate total remaining distributions to be denied QCD status (this includes any deductible Traditional IRA contributions made by the account owner after reaching age 70 1/2 minus any QCD amounts disallowed in prior years);
Determine current-year distributions that will be denied QCD status (by identifying the lesser of the amount determined in steps 1 and 2); and
Determine current-year distributions which will be treated as a QCD (by taking the amount from step 1 and subtracting the amount from step 3).

Presumably, this QCD ‘anti-abuse’ provision is meant to prevent individuals from deducting Traditional IRA contributions (above-the-line deductions that reduce a taxpayer’s AGI) and then donating those contributions on a pre-tax basis (as a QCD), particularly in scenarios where they otherwise were not itemizing deductions and could not have otherwise made a pre-tax charitable contribution.

Despite this new provision, though, financial advisors can use numerous strategies to help clients benefit from QCDs. For example, Traditional IRA contributions can be voluntarily removed if done by October 15^th of the year following the year in which the contribution was made. Thus, an account holder who makes a contribution, who then decides they would instead prefer to make a QCD, can withdraw the contribution within the allowable timeframe, preventing any reduction to their QCD. Alternatively, married spouses who each have their own IRA account can choose to use one account to receive post-70 1/2 deductible contributions and the other to make QCDs. A third option would be for account holders to simply ‘burn’ through their post-70 1/2 contributions by making charitable donations from their IRAs that ‘use up’ QCD-disqualifying contributions as quickly as possible. While this means that taxable income will be reported for those account distributions, charitable gifts may be reported as itemized deductions, with future QCDs to be unaffected by these contribution amounts.

Some additional strategies available to advisors and their clients work to avoid the anti-abuse rule altogether. These include using other tax-efficient means to make charitable contributions (such as donating highly appreciated stock in a taxable account, which avoids potential capital gains taxes from selling the stock outright and, for those who itemize, allowing the contribution to be itemized as a charitable donation), contributing to employer-sponsored retirement plans (e.g., 401(k)s, and even SEP IRAs and SIMPLE IRAs) or Roth IRAs instead of Traditional IRAs (since contributions to Traditional IRAs only result in QCDs being denied), and choosing not to claim the deduction on Traditional IRA contributions (even if otherwise available) and deliberately making non-deductible contributions instead (to at least preserve the non-taxable treatment of those contributions for the future).

Ultimately, the key point is that the SECURE Act’s repeal of the age limit cap on Traditional IRA contributions has complicated the coordination of post-70 ½ contributions and QCDs with its introduction of the anti-abuse provision, which reduces allowable future QCDs by the amount of post-70 ½ IRA contributions. However, financial advisors can help their clients continue to make QCDs successfully with a range of planning strategies, some of which work with the anti-abuse provision, and some that avoid it altogether.

#FASuccess Ep 160: Accelerating Growth By Spending More Than 10% Of Revenue On Marketing (That Works), with Gabriel Shahin

January 21, 2020 07:05 am 8 Comments CATEGORY: Financial Advisor Success Podcast

Welcome back to the 160th episode of Financial Advisor Success Podcast!

My guest on today's podcast is Gabriel Shahin. Gabriel is the founder of Falcon Wealth, an independent RIA based in the Greater Los Angeles area that oversees nearly $200 million of assets under management for 370 clients.

What's unique about Gabriel, though, is the way he's built his firm to $200 million of AUM from scratch in barely 5 years by spending proactively on marketing as much as 10% to 20% of his annual revenue, amounting to almost $30,000 per month in marketing spending this year, on which he's typically able to make back nearly double the revenue of his marketing spend in the first 12 months alone, and of course, may have a client for life for all the years thereafter.

In this episode, we talk in-depth about how Gabriel allocates his proactive marketing dollars. From spending on outsourced SEO experts and Google AdWords to various paid web listings like NAPFA, the CFP Board and SmartAsset, paying for a weekly radio show and spending as much as $8,000 per mailing for an outside firm to help him market educational classes that he uses to teach personal finance and establish a relationship with the students, some of whom eventually decide to become clients as well.

We also talk about how Gabriel handles the sales process given the number of leads he's able to generate with his proactive marketing. Why he ultimately decided to hire a standalone business development associate to respond to all the inquiries and screen them within 10 minutes of contacting the firm, how Gabriel conducts his 2-meeting sales process to deliver initial value to clients and then encourage them to work with him on an ongoing basis to implement, and how Gabriel gracefully handles the leads his marketing generates that may not have the financial wherewithal to be a good fit for his firm.

And be certain to listen to the end, where Gabriel talks about struggles of going out on his own. How we ended out racking up nearly $50,000 in credit card debt doing his initial marketing to get his first clients in the door, the way he was able to attract some clients from his prior firm without violating his non-solicit agreement, and the challenge that even as the firm scales up the revenue much faster than the take-home profits, it becomes increasingly necessary to reinvest into the infrastructure of a growing advisory firm along the way, especially when he's growing quickly.

The Art Of Vision Statements: Do They Really Help Advisory Firms Grow?

January 20, 2020 07:10 am 3 Comments CATEGORY: Practice Management

For every business owner, a well-written vision statement can be a tremendously effective tool, helping to clarify the long-term direction in which they want to take their companies. Although advisory firm owners are no different, there’s a difference between a vision statement that helps drive growth, and a vision statement that does little more than serve as a platitude that looks good on brochures, or one that speaks to the financial goals of the owner but not necessarily the aspirations of the business itself. Which, in turn, begs the question: how, exactly, does a growth-minded financial advisory firm owner actually create an effective vision statement for their firm, and does it matter what kind of vision statement they craft?

In this guest post, Angie Herbers – Chief Executive and Senior Consultant at Herbers & Company, an independent management and growth consultancy for financial advisory firms – shares recent research conducted by her company, revealing interesting data about the relationship between vision statements and firm growth, and what that means for advisory firm owners trying to clarify the long-term vision they have for (and improve the long-term growth trajectory of) their practices.

Specifically, Herbers’ findings reveal that revenue for advisory firms operating without a vision statement declined by 4.3% over the past year. Other firms that were operating with performance-based vision statements expressed primarily in financial terms (e.g., achieving a particular revenue, profit, or assets under management benchmark), had an average growth rate of 5.8%. Whereas the third group of firms, which operated with client-centric vision statements focused on serving clients and improving the client experience, had a growth rate of 13.4% – more than twice the growth observed for the firms with performance-based vision statements!

The impact of advisory firm size on the magnitude of growth was also examined for firms with client-centric vision statements; the data revealed that firms with such vision statements had relatively similar growth rates (between 12% – 14.5%) across revenue ranging from less than $1M to more than $15M. Which is interesting, because small firms often have an easier time achieving high growth rates as compared to larger firms; larger firms, on the other hand, have the advantage of leveraging economies of scale (or simply having the ability to merge with other large firms) to facilitate growth. As it turns out, a strong client-centric vision statement appears to impact both.

A deeper look at the psychology of business growth offers potential explanations of why the growth of firms with client-centric vision statements outpaced those with performance-based vision statements. As while centering a firm’s vision on servicing clients will encourage the firm as a whole to focus first on providing high-quality service and continuously improving that service (and thus naturally leading to a better overall client experience, growing reputation, and stronger brand), a performance-based vision statement can easily decouple a firm’s association of client service efforts with revenue generation… which can then (understandably) lead to employees who are distracted by financial performance and individual compensation versus focusing on providing good client service and the actual client experience that powers growth in the long run.

The psychology of why client-centric vision statements appear to be more effective than performance-based ones is also reflected in the approach used by many financial advisors to advise their own clients, where clients are often discouraged from focusing too intently on the details of their portfolio returns, and instead to focus more on their long-term big-picture goals that they have determined will make them happiest (and then simply monitoring and making adjustments to ensure they’re staying on track towards those goals).

Ultimately, the key point is that a well-designed, client-centric vision statement can actually result in a more fruitful outcome than a performance-based vision statement, because maintaining a firm’s attention on making clients happy with great service is generally the more sustainable route to healthy, positive business growth, and will take care of the financial bottom-line in the process.

Weekend Reading for Financial Planners (Jan 18-19)

January 17, 2020 02:51 pm 1 Comment CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" – this week's edition kicks off with the industry news that FINRA will be probing brokerage firms (both for retail clients and ostensibly RIA custodians as well) regarding their often-conflicted cash sweep programs into affiliated banks or proprietary money market funds, which has taken on an increased focus in the new era of zero commissions (where platforms have to rely more than ever on earning net interest revenue from client cash instead). Also in the news this week is the rumor that private equity firm TA Associates may be shopping Orion Advisor Solutions... for a nearly $2B valuation, in what will likely be a sale (if it occurs) to another private equity firm or industry-strategic buyer focused on growing Orion even larger as the world of advisor technology continues to heat up.

From there, we have several articles on marketing, including a Broadridge study finding that advisors are increasingly investing into various forms of digital marketing over purely traditional (i.e., live in-person channels), a Snappy Kraken study finding that email (and a website call-to-action to join a mailing list) is still far better at generating leads for advisors than social media, a look at various digital marketing strategies that financial advisors can experiment with on their websites, and why 'old-fashioned' book publishing can still be an effective advisor marketing strategy (but is not a very good advisor business opportunity for the book sales themselves).

We also have several articles on more technical planning issues, including a look at the new provisions of the SECURE Act that will allow up to $10,000 of 529 college savings plans to be used to repay student loans (or for an apprenticeship program), Fidelity's launch of an HSA platform for advisors to manage their clients' Health Savings Accounts (though it's not clear that many clients will ever have HSA balances large enough to be worthwhile for advisors to do so!), and when it makes sense to consider claiming Social Security's 6-month-retroactive-lump-sum payment for those who begin their benefits after Full Retirement Age.

We wrap up with three interesting articles, all around the theme of breaking old habits and forming new ones: the first provides a series of tips from successful executives and business leaders about their key habits for productivity; the second looks at how moving (i.e., relocating where you live and/or work) presents a unique opportunity to break old routines and form new habits; and the last explores some of the research about habits and willpower, and how those who have above-average self-control tend to be more successful not because they're better at avoiding or breaking their bad habits but because they're better at focusing their energy to form similarly-hard-to-break good habits instead... or stated more simply, that the key to improving your own behavior is less about trying to force yourself to stop doing the things you don't like, and more about finding and forming habits around the things you do like instead!

Enjoy the 'light' reading!

Kitces & Carl Ep 25: The Overconfident Conversation And Walking Clients Back From The Greed Ledge

January 16, 2020 07:06 am 0 Comments CATEGORY: Kitces & Carl Podcast

When market conditions become volatile and scared clients are on the verge of panic about the potential to lose even more money, financial advisors are faced with the challenge of talking their clients “off the ledge” from making a potentially disastrous investment choice to leap out of the market near the bottom and risk missing the recovery. Getting clients to actually stay the course, though, is easier said than done, as simply telling clients “Don’t panic!” doesn’t necessarily help them to do so!

Alternately, when the pendulum swings the other direction and markets are ramping upwards, clients can become overconfident and as natural greed begins to kick in… often asking for even more of their top-performing investments (regardless of the additional risk), and less of the poorly performing ones in their portfolios (that may have simply been the conservative diversifiers). Which introduces yet another challenging conversation, as telling clients “don’t be greedy” in the heat of the moment isn’t necessarily any more effective, either!

In our 25th episode of Kitces & Carl, Michael Kitces and financial advisor communication expert Carl Richards revisit their earlier podcast discussion about how to talk clients off the ledge from ‘scary’ markets and then explore the flip side of the situation and how to keep clients from making bad decisions in the midst of a raging bull market.

Advisors can structure these ‘overconfidence’ conversations using a three-question framework, asking the following questions:

If you proceed with this decision and it works out as expected, how would your life be different?;
If you made this investment and you were wrong about how you expected it would do, how would your life be different?; and
Have there been things you were really certain about in the past that didn’t work out as planned?

Typically, clients will respond to these questions by acknowledging that if all things go as planned, there will be marginal (but only marginal) improvements to their situation (e.g., perhaps there will be extra vacation time or an opportunity to travel); however, if the outcome turns out badly, the consequences will be much more worse, often leading to disastrous circumstances that can involve severe losses (or even bankruptcy or divorce!). When faced with the third question, clients may realize that, while the positive outcome might sound appealing, there is a real risk of an alternative outcome having serious, potentially devastating effects, and that they can’t be ‘too confident’ about the good outcome as they recognize their own failed predictions of the past.

Often, this process is enough to help clients realize that, while the decision they are contemplating might sound like a good idea, it may not really be worth the risk involved – both the risk of a bad outcome in general and the risk that they are wrong about their ‘confident’ prediction it will turn out well.

But sometimes, a client may be too caught up in the appeal of a tempting opportunity and may want to proceed anyway. In these instances, advisors can re-connect the client’s focus to their ‘deeper yes’ – the important core values and goals they identified in their financial plan in the first place. If this approach still isn’t enough for the client to reconsider, then establishing a separate non-managed account can be an effective reminder to the client that the investment is separate from the plan, compartmentalizing the potential risk (and hopefully keeping the amount actually invested limited to a manageable minimum). On the other hand, if the client is dead set on going all in with the investment opportunity, it may simply be a signal to the advisor that it is time to part ways with the client… to avoid the ‘collateral damage’ that can, unfortunately, occur if clients harm themselves against the advisor’s advice but then still look to the advisor for someone to blame.

Ultimately, the key point is that the ‘overconfidence’ conversation is not very different from the ‘scary markets’ conversation; clients may simply need to be reminded that even though the markets may be doing well, making intentional decisions that stray from their investment strategies can throw their plans off course just as easily as a hasty decision made out of fear during bad market conditions.

Selecting Income-Driven Repayment (IDR) Plans To Manage Student Loan Obligations

January 15, 2020 07:15 am 13 Comments CATEGORY: Debt & Liabilities

Income-Driven student loan repayment plans, which started with Income-Contingent Repayment (ICR) in 1993, can make monthly repayment substantially more affordable for many borrowers by limiting student loan payments to no more than a certain percentage of income. However, when considering any of the five Income-Driven Repayment (IDR) plans, it’s critical to think not only of how borrowers may manage the monthly repayment costs but also of the long-term income trajectory of the borrower. Since payments are based on income, those who expect high future earnings may not benefit from using an IDR plan; because payments increase proportionately with income levels (and depending on the interest rate(s) of the loans being paid off), the borrower may or may not be better off maintaining lower monthly payments than paying the loan off quickly with higher payments. Which makes the decision to choose an IDR plan potentially complex, especially since many repayment plans for Federal student loans not only limit monthly payments relative to income but may also actually trigger forgiveness of the loan balance after a certain number of years.

Accordingly, the first line of action for borrowers tackling student loan debt and its potential repayment strategies is to identify the specific goal: to pay the loan(s) off in full as quickly as possible and minimize the interest expense along the way, or to seek loan forgiveness and minimize total payments along the way (in order to maximize the amount forgiven at the end of the forgiveness period). Once the objective is clear, planners can explore the repayment options available.

For those seeking the path of loan forgiveness, IDR plans that limit current payment obligations are often preferable, as even if they lead to the loans negatively amortizing (as the interest accrual on the student loans may significantly outpace the required payment if a borrower has a relatively low income), doing so simply maximizes forgiveness in the end. On the other hand, debt forgiveness may not be best; if the borrower does stay on that IDR plan all the way through forgiveness (typically 20 or 25 years), the forgiven amounts may be treated as income for tax purposes (which for some borrowers, could actually bring the total cost to far higher than what they would have paid had they actually paid down their loan balance to $0!).

Ultimately, the key point is that repayment strategies should be chosen carefully, as the desire to manage household cashflow often entails minimizing payments that maximize forgiveness, but the income tax consequences of forgiveness and rising repayment obligations as income grows can sometimes result in higher total borrowing cost than simply paying off the loan as quickly as possible!

#FASuccess Ep 159: Navigating Financial Advisor Career Opportunities Under The Employee Model, with Kelly Shikany

January 14, 2020 07:08 am 0 Comments CATEGORY: Financial Advisor Success Podcast

Welcome back to the 159th episode of Financial Advisor Success Podcast!

My guest on today's podcast is Kelly Shikany. Kelly is a financial advisor and director of wealth management for Lakeside Wealth, a hybrid RIA based in Chesterton, Indiana, right outside Chicago, where Kelly manages a base of nearly $90 million of client assets.

What's unique about Kelly, though, is her decision to not hang her hat as a solo advisor and instead navigate existing advisory firms that have already established the necessary infrastructure to operate the firm, allowing her to focus on clients and not needing to live in an "eat what you kill" grid-based environment.

In this episode, we talk in-depth about Kelly's career path through the advisory industry under the employee model. From starting out as a trust accountant for ERISA plans with Northern Trust, shifting to become a trust officer with an independent trust company, transitioning to the independent channel under the Wells Fargo FiNet platform, and then joining her current firm with an opportunity to grow by servicing clients that the firm acquires in its own efforts to grow.

We also talk about how Kelly grew her client base in the early years by conducting women's circles as a way to network and establish relationships in her small town community. The reason she decided to pursue the CDFA designation as a way to initially differentiate herself, and how ultimately she decided the best way to differentiate herself was simply her ability to have a different kind of conversation with her clients in the first place.

And be certain to listen to the end, where Kelly talks about how she structures her week to maximize personal productivity. Why it's so difficult for most of the employee model to even figure out the right questions to ask when evaluating potential advisor job opportunities, and why it's important to balance a positive desire to be loyal to your firm and clientele with focusing on your own needs to find a fulfilling career and the right place to work as a financial advisor.

Announcing New Members Section Tiers And Re-Visioning Nerd’s Eye View For The 2020s

January 13, 2020 07:07 am 2 Comments CATEGORY: Nerd's Eye View

When the 2010s began, the primary business of Kitces.com was selling $149/year subscriptions to The Kitces Report, our paid monthly newsletter on advanced financial planning topics that provided CFP CE credit. And ‘on the side’ we launched the Nerd’s Eye View blog, as a way to share content on industry trends and practice management – content that might help advisors to be more successful but wouldn’t necessarily be eligible for CFP CE.

Over the past decade, though, the Nerd’s Eye View blog grew exponentially – now to more than 250,000 unique visitors every month – driving a shift of our content to be increasingly available for free through the blog, and The Kitces Report to become part of a broader “Kitces.com Members Section” that offered fewer newsletter issues but also with other ways to earn CE credit (including CE credits for the Nerd’s Eye View blog and a growing library of webinars).

Now, however, the growth of the Kitces.com platform is allowing us to expand the Members Section even further. Beginning in February, our Basic tier will provide a series of new webinars available every month (in addition to CE opportunities for our Nerd’s Eye View blog content), and the Premier tier will gain access to all of our webinar (and The Kitces Report) archives, a new Kitces Graphic Library for advisors to use our blog graphics with their clients and prospects, and a new private Members-Only Office Hours for the advisor community to ask questions of Michael and the team directly. In addition, Kitces.com will soon be part of a pilot program to develop written CFP Ethics CE, which should become available to both Basic and Premier tiers in the second quarter!

To support the growth of the Kitces.com Members Section, we’re also excited to announce a number of new additions to the team, including Erica Crane as our new Senior Technical Editor, Matt Nelson as our new Director of Advisor Education, and promotions for Jeff Levine (now officially our ‘Lead Financial Planning Nerd’) and for Rachel Zeller (from Operations Manager to Managing Director)… with more hires anticipated in the coming year as we continue to expand the Kitces.com services to the advisor community!

As ultimately, the reality is that we’re still just getting started here at Kitces.com. While the decade of the 2010s was about a mission of “Advancing Knowledge in Financial Planning”, in the 2020s we’re expanding our mission further to “Helping Financial Advisors Be Better, And More Successful” – better in the technical knowledge of financial planning and the skills to deliver that advice, and more successful in your career, your business, or whatever it is that ‘success’ means to you. Which means in the 2020s you’ll see not only our ongoing educational Nerd’s Eye View content, but also more Research on best practices in being a successful financial advisor, more Resources to help you be successful in your career or business, and new programs to help you further build your financial planning skills.

I’m so thankful to all of you, our readers, for joining us on the journey this far, and I can’t wait to share more of what we’re working on in years to come!

Weekend Reading for Financial Planners (Jan 11-12)

January 10, 2020 03:02 pm 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" – this week's edition kicks off with the industry news that Envestnet is partnering with Dynasty Financial to create a new "Advisor Services Exchange" (ASx), and in the process is taking a small financial stake in Dynasty, raising questions of whether Envestnet is seeking to evolve beyond its technology core into a broader range of advisor services.

Also in the news this week was the announcement that former Congressman Chris Dodd and Barney Frank have filed an Amicus Brief against the SEC regarding Regulation Best Interest (Reg BI) claiming that as the ones who wrote the law itself the SEC misinterpreted the authority they were granted under Dodd-Frank to issue Reg BI (and that therefore the rule should be vacated), the governor of Massachusetts is advocating on behalf of the financial product manufacturers and broker-dealers that the state should consider walking back its fiduciary proposal, and a coalition of trade associations are coming together to make the case that Congress should allow financial advisors to claim the 20% Qualified Business Income (QBI) deduction in the future (though it's not clear that Congress will take up any tax legislation this year!).

We also have several articles on practice management and succession planning, including: the benefits of deliberately hiring younger and less experienced (but potentially longer-tenured and more creative) advisors into a firm; the common reasons that Millennial advisors quit their advisory firms; how to better promote a culture of positive work/life balance to avoid burning out next-generation talent; the factors to consider (or not) when trying to select a future successor for the firm; and why the development of next-generation successor leaders in an advisory firm requires a fundamentally different set of talents than what the founder needed to learn to grow the business to that point in the first place.

We wrap up with three interesting articles, all around the theme of generalists versus specialists: the first explores how specialists have more opportunities to succeed but are also more prone to being disrupted and unable to adapt, such that it's important to keep some 'generalist' interests as well; the second dives into research finding that generalists tend to be more successful in slow-moving environments while in an increasingly complex world it's actually the specialists with the domain knowledge to spot opportunities in environments of rapid change; and the last introduces the concept of the 'Generalized Specialist', who develops a core competency of expertise but also tries to deliberately maintain a broader multi-disciplinary perspective as well (to be better able to both adapt and integrate new, disparate ideas).

Enjoy the 'light' reading!

How Required Minimum Distribution (RMD) Changes Under The SECURE Act Impact Retirement Accounts

January 8, 2020 07:04 am 23 Comments CATEGORY: Retirement Planning

Last month, the Setting Every Community Up For Retirement Enhancement (SECURE) Act was passed into law, creating the most substantial updates to the laws governing retirement accounts since the Pension Protection Act in 2006. One notable change resulting from the SECURE Act will be the increase in age at which Required Minimum Distributions (RMDs) must begin. Prior to the SECURE Act, individuals with IRA accounts or qualified employer-sponsored retirement plans were required to take RMDs beginning in the year in which they turned 70 ½ with a deadline (for the first RMD only) of April 1 of the following year.

Beginning in 2020, however, the new age at which RMDs must start is age 72 (also with a deadline of April 1 of the following year). Notably, RMDs for individuals who turned 70 1/2 in 2019 are not delayed, and instead, such individuals must continue to take their RMDs under the same rules prior to passage of the SECURE Act. Despite the delay in the starting age for RMDs, though, Qualified Charitable Distributions (QCDs) from IRAs will not be affected by the SECURE Act; accordingly, QCDs may still be taken from IRAs as early as age 70 1/2.

While the same life expectancy factors will continue to be used with no change under the SECURE Act, the IRS has recently (and separately) proposed to update the current life expectancy tables to adjust for longer expected lifespans. The IRS proposal has not yet been finalized, but is largely expected to be effective for RMDs calculated for 2021, and beyond.

Interestingly, for those who were born in the first half of the year (i.e., between January 1^st and June 30^th), the SECURE Act provides a longer delay of the first RMD than for those individuals born on July 1^st or later. Those with birthdates in the first six months of the year reach age 70 and 70 1/2 in the same year (and thus their first RMD is not required until two years later, when they reach age 72), whereas those whose birthdates are in the last six months of the year reach age 70 1/2 in the year they reach age 71 (and thus, their first RMD is ‘only’ delayed until the following year, when they turn 72).

The majority of retirees will not be impacted by the delayed RMD starting age (since most people aren’t able to afford to wait until the age when RMDs must begin), but for those that are, strategically timed Roth Conversions can be an effective tool to accelerate income in a tax-efficient manner, leveraging the additional time that IRA owners are afforded before their RMDs start, thus increasing their annual income.

Ultimately, the key point is that, while the change in RMD starting age won’t impact a large swath of the population, financial advisors are likely to have clients who will be affected by the change and who may benefit from the additional time in which Roth Conversions can be executed. Furthermore, advisors should also review their technology systems and planning processes, specifically for clients born after June 30, 1949 and who will be affected by the new RMD rules.