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IRA Required Minimum Distributions (RMD) are complicated enough. In simple terms, the amount of the RMD is based on your age and account value as of the end of the previous year. But things are rarely simple when dealing with IRAs and the distribution rules.
Different rules apply to IRAs, 401(k)s and inherited retirement plans. And different life expectancy tables apply to different types of IRA owners.
Add to that, recent changes to the RMD rules in 2020, 2021 and 2022 make the likelihood of a missed or miscalculated IRA RMD nearly as certain as death and taxes.
Unfortunately, you can only defer taking distributions from your IRA for so long. Eventually, you must begin taking money out of these highly taxable accounts. Be sure to check with your IRA custodian or tax professional regarding your situation.
72 is the new 70. The required beginning date (RBD) for IRAs has been changed to April 1 of the year after the year you turn 72. Under the old rules, the RBD was April 1 of the year after you turned age 70 1/2.
If you turned 72 in 2022, you must do an IRA RMD for this year (2022) no later than April 1 of 2023. In subsequent years, your IRA RMD must be done by December 31 of each year.
This doesn’t mean you can skip your 2022, IRA RMD. It just means you can delay taking your first RMD until April 1 of next year. If you go that route, you will take two RMDs in 2023 – one for 2022 (before the April 1 deadline) and one by December 31, 2023 for the 2023 RMD.
If you turned 72 this year and like to keep things simple, just take your IRA RMD before the year is over.
Special rules apply for inherited IRAs. If you inherited an IRA or retirement account from someone other than your spouse, the RMD rules get more complicated. In fact, I will save that topic for a different blog post.
In the meantime, if you inherited an IRA check with your tax professional, financial advisor or IRA custodian to calculate your Required Minimum Distribution and create a strategy for minimizing your tax burden.
For a reading list of articles relating to the new IRA RMD rules, especially for inherited accounts, check out these articles from Ed Slot.
Some basic rules haven’t changed. If you own multiple IRAs, you may take your annual RMD out of any one IRA or a combination of them. Roth IRAs still have no RMD. 401(k) plans require a separate RMD for each 401(k) unless you are still working at that employer. In that case, you can skip the RMD on your current workplace retirement account if you remain employed on December 31.
One more rule that hasn’t changed: missed or incorrect RMDs are subject to an IRS penalty equal to 50% of the RMD amount.
Of course, even this has exceptions. According to Ian Berger, IRA Analyst with Ed Slott & Co, “The IRS waived the 50% penalty on missed 2021 and 2022 inherited account RMDs for beneficiaries subject to the SECURE Act 10-year payout period”. This exception applies only to certain people who inherited IRA accounts from people who died in 2020.
To read the specific IRS language, check out IRS Notice 2022-53 or read this article by Ian posted on the Ed Slot IRA Mailbag.
RMDs are just minimums. Eventually, you must take a specific minimum distribution from your IRA and other retirement accounts, but that doesn’t mean you shouldn’t take more. IRA owners are free to take penalty-free distributions from their IRA anytime after age 59 ½.
In some cases, you may be better off to take more out of your IRA now. For example, if 2022 was a low-income year and you expect your tax bracket to be lower this year than in future years. Taking a larger than minimum income distribution this year could result in less tax being paid over the life of the IRA.
Putting money into an IRA or retirement plan is easy. Keeping up with, and following, the distribution rules correctly is where most IRA disasters happen.
Talk to an appropriately qualified professional to calculate your minimum distributions and create a big-picture strategy to make sure you pay the tax you owe and no more.
To discuss any of the topics in this blog or to learn more about how we can help you Cross The Bridge To A Confident Retirement, please contact me through my web site mikebranch.net, call me directly at 651-379-3935 or email me at mpbranch@focusfinancial.com.