How well do you understand required minimum distributions (RMDs), which the IRS describes as “the minimum amount you must withdraw from your [retirement] account each year”? RMDs can be complicated, and there are changes coming for 2022 related to how they are calculated: In short, the divisors are increasing, which means the amount required to be withdrawn is decreasing.
QUIZ TIME
To test your knowledge, take the following quiz. It’s adapted from “The New Retirement Savings Time Bomb,” which is authored by Ed Slott, CPA, “America’s IRA Expert.” The book was published in 2021 after the adoption of the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019, which took effect in 2020.
Again, this looks ahead to 2022, when the new IRS tables will be in effect.
As always, be sure to check with your tax adviser before taking any action, because every person’s situation is unique.
ASSUMPTIONS
For this quiz, assume that we are talking about a tax-deferred IRA with a balance of $500,000 at the end of this year (12/31/2021).
WHAT’S YOUR RMD?
Question No. 1: Frank is age 74. His sole beneficiary is his wife, Sharon, who is 72 years old. What is Frank’s RMD for 2022?
Answer: $19,608.
To get that answer, use the new Uniform Lifetime Table, which goes into effect in January 2022 and is currently found at regulations.gov. (IRS Publication 590-B for 2021 does not have the new 2022 tables.)
Using the Uniform Lifetime Table, find the “distribution period” for age 74, which is 25.5. Take $500,000. Divide by 25.5. Your answer: $19,608, which is the RMD amount that Frank will need to take out of his account in 2022 under the new tables. (Under the tables in effect in 2021, the RMD would be $21,008 based on the age of 74 and a divisor of 23.8, and assuming a 12/31/2020 value of $500,000.)
A MUCH YOUNGER SPOUSE?
Question No. 2: Assume Frank’s wife, Sharon, is 45 instead of 72. Would the answer still be $19,608?
Answer: No. The RMD is only $12,107. Because Frank’s wife is both the sole beneficiary AND is more than 10 years younger than Frank, another table applies (the Joint Life and Last Survivor Expectancy Table, which also can be found at regulations.gov). To use the table, you look up the ages of both spouses, in this case 74 and 45, for a divisor of 41.3. Dividing $500,000 by 41.3 gives you $12,107 for Frank’s RMD for 2022. (See IRS Pub. 590-B for 2020 for the tables in effect in 2021. Assuming the same ages, 74 and 45, for comparison purposes, the 2021 divisor is 39.2.)
Question No. 3: This time, Frank has tw0 beneficiaries (Sharon, his wife, and Frank Jr., his son, who is 6 years old). Frank’s beneficiary designation gives Sharon 90% of the IRA when Frank passes, and 10% goes to Frank Jr. What’s Frank’s RMD for 2022?
Answer: Because Sharon is not the sole beneficiary, the Joint Life Table does not apply. Instead, use the Uniform Lifetime Table. The RMD for 2022 is the same as in the first question above, $19,608.
Death?
Question No. 4: Samuel is 74 and his wife, Carolyn, is 53 and the sole beneficiary of his IRA. Unfortunately, Carolyn dies on January 3rd of 2022. In April of 2022, Samuel names his son, Kevin, age 25, his beneficiary. How much is Samuel’s 2022 RMD?
Answer: Marital status is determined on Jan. 1 for a given year (2022 in this case), so even though Carolyn passed away, the RMD is factored based on the Joint Life Table. The divisor is 34.1. Samuel’s 2022 RMD is $14,663 ($500,000 divided by 34.1).
Question No. 5: What happens the following year? Is the Joint Life Table used again? Since Samuel’s son, Kevin, is the beneficiary, what is Samuel’s RMD for 2023?
Answer: The Uniform Lifetime Table applies for this situation. In 2023, Samuel would be 75, and the life expectancy divisor would be 24.6. Assuming the IRA balance for 12/31/2022 is $500,000, Samuel’s RMD would be $20,325 ($500,000 divided by 24.6).
School Benefit
Question No. 6: George names his alma mater to be the beneficiary of his IRA. George is 74 in 2022. What will be his RMD for that year?
Answer: $19,608. The beneficiary’s identity is not important, as long as it does not involve the spousal exception. The Uniform Lifetime Table is used, and the answer is the same as in the first question.
Inherited IRAs
Question No. 7: Doug dies at the age of 76 in 2022 before taking his RMD for the year. His balance at the end of 2021 is $500,000. His son, Robert, is the sole beneficiary and is 30 years old. What happens with Doug’s RMD for 2022?
Answer: In the year of the IRA holder’s death (2022), the RMD is calculated using the Uniform Life Table and the age of the deceased owner (76) at death. In this case, $21,097 ($500,000 divided by 23.7) will need to be withdrawn by Robert before the end of 2022. Robert will have to pay income taxes on the withdrawal.
Question No 8: What happens in 2023 for Robert, who now has inherited his dad’s IRA?
This will be a little more complicated. Under the SECURE Act, the balance of Doug’s IRA must be fully distributed “by December 31 of the year containing the 10th anniversary of the owner’s death,” according to IRS Publication 590-B. Robert would have to evaluate the best method for him to take the IRA distributions based on his tax situation. His options? Take out any amounts he wishes during the 10-year period or wait until the 10th year to take out everything. In any case, Robert’s withdrawals will be subject to income taxes.
LEARN MORE
If you have retirement accounts, you owe it to yourself to understand the rules that apply to distributions, such as the RMD rules we discussed. The IRS’s publications are helpful, as is Slott’s book, which I highly recommend.
Slott’s opening Note to his book makes an intriguing point: “Now, your retirement savings are at even greater risk with new tax laws like the massive SECURE Act (which actually makes your retirement savings less secure — thanks, Congress!).”
Indeed, knowledge is called for. RMDs are complicated to say the least.
QUESTIONS?
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