facebook twitter instagram linkedin google youtube vimeo tumblr yelp rss email podcast phone blog external search brokercheck brokercheck Play Pause
Retired Military Finances 201: Decoding Required Minimum Distributions Thumbnail

Retired Military Finances 201: Decoding Required Minimum Distributions

Taxes

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:

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.


If you found this article useful, you might like the following blog posts:

When an IRA Isn't an IRA


Watch Out for this Tax Tripwire


Military Finances 101: What You Need to Know About Roth Conversions



Disclaimer
Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by C.L. Sheldon & Company, LLC ), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. C.L. Sheldon & Company, LLC does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to C.L. Sheldon & Company, LLC website or incorporated herein, and C.L. Sheldon & Company, LLC takes no responsibility therefore. All such information is provided solely for convenience, educational, and informational purposes only and all users thereof should be guided accordingly. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from C.L. Sheldon & Company, LLC . To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. C.L. Sheldon & Company, LLC is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the C.L. Sheldon & Company, LLC ’s current written disclosure statement discussing our advisory services and fees is available for review upon request. DISCLAIMER OF TAX ADVICE: Any discussion contained herein cannot be considered to be tax advice. Actual tax advice would require a detailed and careful analysis of the facts and applicable law, which we expect would be time consuming and costly. We have not made and have not been asked to make that type of analysis in connection with any advice given in this blog post. As a result, we are required to advise you that any Federal tax advice rendered in this blog is not intended or written to be used and cannot be used for the purpose of avoiding penalties that may be imposed by the IRS. In the event you would like us to perform the type of analysis that is necessary for us to provide an opinion, that does not require the above disclaimer, as always, please feel free to contact us.