Throughout your working years, it is well known how important it is to start saving for retirement to accumulate as much reserves as you can for when you stop working. Opening and contributing to an IRA or other qualified retirement plan early on, will certainly pay dividends down the road. As these accounts grow it is important to understand the many different rules attached to them to best utilize them to your advantage.
What is an RMD and When is it Required?
Most traditional individual retirement accounts, along with both traditional and roth 401(k)’s, will ultimately require a “Required Minimum Distribution”. A RMD is the required amount that you must distribute from your retirement account(s) each year once you reach a certain age. Before the implementation of the Secure Act, RMD’s would have started once a person hit age 70 ½. Now, RMD’s for most individuals must begin once they turn 72.
Anyone born after June 30th, 1949 will be required to take their first RMD by April 1st in the calendar year following when they turned 72 (Delaying the first RMD to the following year, will require the individual to take two RMD’s that year). The IRS imposes heavy penalties if an RMD is not taken, or if the amount is not large enough. If you do not withdraw at least the RMD amount once you hit your RMD age, there is a 50% tax penalty assessed on the amount that was not distributed from the account.
How RMD’s in 2022 (and beyond) are Different
There have been some recent changes to required minimum distributions for 2022 and moving forward. As of this January, the IRS has issued new life expectancy tables which are used to determine RMD amounts. The IRS calculates an RMD by, “The required minimum distribution for any year is the account balance as of the end of the immediately preceding calendar year divided by a distribution period from the IRS’s “Uniform Lifetime Table.” The updated tables will essentially add a year or two to everyone’s life expectancy and will lower the amount a person is required to withdraw from their account(s) each year.
These tables will also affect the way RMD’s are taken for inherited retirement accounts as well. As we discussed in our article last year, the Secure Act also changed the way inherited accounts are distributed in some cases, by eliminating the stretch IRA for “non-eligible designated beneficiaries”. For all inherited IRA’s, including those that are already taking RMD’s, the updated life expectancy tables will influence your 2022 RMD amount.
For those already taking RMD’s for inherited accounts based on their age in the year after the owner’s death, they are allowed to reset their life expectancy based on the 2022 tables. Additionally, anyone that inherits an IRA moving forward will take the required minimum distribution based on the amended tables as well.
Being aware of your RMD amount (if you have one) is crucial to avoid the hefty penalties imposed by the IRS if it is not taken properly. The changes affecting RMD’s for 2022 and beyond can be quite complicated and it is best to consult with your financial or tax adviser to see if you are impacted by the new regulations.