In an article I wrote probably around 5 years ago, I said the Required Minimum Distributions (RMDs) are, perhaps, the most complicated individual tax topic. I stand corrected. RMDs under all the new tax laws are the most complicated individual tax topic. Several things have happened in the ensuing years, they include:
- Changing the age at which RMDs must begin from 70 ½ to 72
- RMDs were waived for 2020
- Inherited IRAs must be emptied in much less time than what used to be required.
- New life expectancy tables will go into effect in 2022
Impacts on Your RMDs
If you have a Traditional IRA or employer retirement plan you can now delay taking your first distribution to 1 Apr of the year after you turn 72 (called the Required Beginning Date (RBD)). This allows your investment to grow tax deferred or tax free for longer. But it means your distributions will probably be larger than if you were covered under the old RMD rules. You should also remember that if you take your first distribution on 1 Apr of the year after you turn 72, you’ll also have to take a second distribution for the year you turn 73. This is because the first distribution is for the year you turn 72, you’re just allowed to delay it into the year you turn 73.
In 2022 the new life expectancy tables will go into effect and since life expectancy has increased, the amount you must take out each year will go down a little. When 2022 arrives, you’ll switch to the new table.
Impacts on Inherited IRA RMDs
To determine the impact of the changes on inherited IRAs, you first have to determine whether the IRA was inherited before 2020.
If you inherited the IRA (or employer sponsored retirement plan) prior to 2020, then you are covered by the old rules. You’ll determine your life expectancy based on your age the year you start taking distributions (in most cases, the year after the original owner passed). Each year you’ll reduce your life expectancy by one year. This is different than how the tables for account owners work. What about 2020? If you skipped the RMD in 2020, your life expectancy will be reduced by 2 years from what you used in 2019. Makes sense, but easy to miss. When the new tables go into effect in 2022, you won’t switch to them like above. Instead, you’ll go to the new table look up the life expectancy for your age when you started taking RMDs and reduce the life expectancy by the number of years that have passed by and use that number for your new life expectancy going forward (subtracting 1 year as each year passes).
If you inherit an IRA after 2020, then the rules change. Unless you’re a spouse or other eligible beneficiary, you don’t have an RBD. But the account must be empty in 10 years. Life expectancy doesn’t have any bearing on taking money out. It is important to remember that if there is a second inheritance, that the new beneficiary doesn’t get an additional 10 years. The account must be empty based on the original deadline.
This Stuff isn’t Simple
Like I said at the start, RMDs are complicated and the penalties are hefty if you don’t take your RMDs when required. The unique financial benefits available to military members and retirees can also be complicated. At C.L. Sheldon, we think that you should work with a financial planner or advisor that deals with military and veteran benefits each and every day. If you’d like to chat about how we can help you, give us a call or use the button below to schedule a free initial consultation.
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