Required Minimum Distribution Changes: What’s New in 2022
Figuring we’ll all live a little longer, the IRS updated the life expectancy table, as of Jan. 1, 2022. Why does that matter to you? Required Minimum Distributions (RMDs) are calculated based on life expectancy and other factors, so this change ultimately means you could take a smaller distribution from tax-advantaged retirement accounts such as a 401(k).
Q: At What Age Do I Need to Take an RMD?
A: Legislation passed in 2019 changed the RMD age from 70 ½ to 72 for those born after June 30, 1949. For example, if you turn 72 in October 2022, your first RMD must be taken by April 1, 2023, and your second RMD must be taken by Dec. 31, 2023.
If you were born on June 30, 1949, or before, you were required to begin taking RMDs by April 1 following the year you reached age 70½. After the first year of taking an RMD, all RMDs thereafter are due on Dec. 31 each year.
Q: Which Types of Retirement Plans Require Minimum Distributions?
A: Profit-sharing plans, 401(k) plans, 403(b) plans, and 457(b) plans, traditional IRAs and IRA-based plans such as SEPs, SARSEPs, and SIMPLE IRAs. RMD rules also apply to Roth 401(k) accounts.
If you own multiple IRAs, you will need to calculate the RMD for each account, but you can take the total RMD from just one IRA or any combination of IRAs. However, if your own multiple 401(k) plans, you must calculate and take each 401(k)’s RMD separately.
Q: Will I Pay Taxes on the RMD?
A: When you take a distribution from your IRA or retirement account, you will owe taxes on all or a portion of the amount. The IRS considers those distributions to be ordinary income so they are taxed at your applicable rate. If you have funded your IRA with any nondeductible contributions, you will need to calculate the taxable portion of the distribution on Form 8606 on your tax return.
Q: What if I Miss the RMD Deadline?
A: If you miss your RMD deadline, you will pay a significant penalty—50% of the shortfall. For example: If your RMD is $10,000 and you distribute $5,000, that’s a possible $2,500 penalty.
Q: Is There a Way to Minimize My Tax Burden?
A: You could consider a Qualified Charitable Distribution (QCD) to a charity of your choice to help circumvent taxes on an RMD. You’re essentially taking pre-tax dollars from your IRA and sending them directly to your preferred charity, thereby circumventing tax liability on the amount distributed. The annual maximum for a QCD is $100,000. Before making a QCD, consider consulting your tax professional or wealth advisor.
In addition, if your first RMD isn’t due until April 1, 2023, you may still decide to take an RMD in 2022 to help reduce your tax burden. Taking two RMDs in one year could push you into a higher tax bracket. Consult with your tax professional on how to time your RMDs based on your individual financial picture.
Q: How Does the Change in Life Expectancy Affect the Calculation of My RMD?
A: Here is an example of how the new life expectancy table lowers the RMD for an individual turning age 77 on her 2022 birthday. To calculate the 2022 RMD from her traditional IRA, she first finds the account balance as of Dec. 31, 2021. Assume it is $1 million and assume that the designated beneficiary of her IRA is not her spouse, who is more than 10 years younger. She divides that year-end balance by the applicable factor from Table 2, the Uniform Lifetime Table, which is 22.9. Her 2022 RMD is accordingly $43,668.12 ($1 million divided by 22.9).1
Under the old tables, her factor would have been 21.2, triggering an RMD of $47,169.81. If she likes to keep her RMDs as small as possible, she will be pleased by this $3,500 reduction, even though it means (eventually) larger RMDs later.1
Q: Are There Any Exceptions to the Rules?
A: If you are still working after age 72 and don’t own 5% or more of the company, you can wait until April 1 of the year after you retire to take an RMD from an employer-sponsored retirement plan. Keep in mind, you’ll still need to take an RMD from traditional IRAs.
If you own a Roth 401(k), you can roll the money into a Roth IRA, which has no RMDs for the original owner. Assuming you are 59½ or older and have owned at least one Roth IRA for at least five years, the money rolled to the Roth IRA can be withdrawn tax free.
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The change in the RMD age requirement from 70½ to 72 only applies to individuals who turn 70½ on or after January 1, 2020. Please speak with your tax advisor regarding the impact of this change on future RMDs. Tax laws and regulations are complex and subject to change, which can materially impact investment results. Mariner Wealth Advisors cannot guarantee that the information herein is accurate, complete, or timely. Mariner makes no warranties with regard to such information or results obtained by its use, and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information. Consult an attorney or tax professional regarding your specific situation.
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