Many of the rules governing retirement accounts have changed over the last few years. Now, more changes have arrived or are on the way.
Required Minimum Distributions Return In 2021
The Coronavirus Aid, Relief and Economic Security Act, passed in March of 2020, exempted retirees from having to take required minimum distributions (RMDs) for the year 2020. The law also permitted retirees to roll back any distributions they had taken before the law was enacted, without paying tax. In 2021, RMD’s have returned. Experts say there is little possibility the IRS will waive them again this year. RMD’s apply to traditional, SEP and SIMPLE IRAs (not Roth IRAs), 401k, 403b and 457b plans.
Smaller Distributions Coming In 2022
The IRS’ RMD distribution tables allow you to calculate the amount you must withdraw from your retirement account annually. The amount is based on two factors: (1) your age, and (2) the value of your retirement account the year prior. The IRS has developed new RMD distribution tables that reflect an increase in life expectancy of about two years (current tables rely on mortality data from 2002). The new tables will go into effect in 2022. Therefore, RMD’s will be smaller beginning in 2022.
An example of how the new tables would work: Let’s say a 72-year-old retiree has $300,000 in an IRA. In 2021, the required withdrawal would be $11,719. In 2022, it would be reduced to $10,948. That’s about a 7% decrease.
As before, you may take a distribution less than your full RMD, but you will have to pay a penalty of 50% of the required amount you failed to withdraw.
SECURE Act Limits Stretch-Out For Non-Spouse Beneficiaries
The Setting Every Community Up For Retirement Enhancement Act of 2019 pushed the starting age for RMD’s from 70½ to 72 (if you turned 70 ½ after Dec. 31, 2019). This rule change was designed to account for the fact that people are living longer and working more years.
The SECURE Act has also had a significant impact on those who wanted to pass on their qualified plans to heirs: Beginning in 2020, a non-spouse beneficiary who inherits a qualified plan may no longer “stretch out” the inheritance using his/her own life expectancy as the basis for withdrawals. Instead, non-spouse beneficiaries must complete all withdrawals within 10 years of the original owner’s death. There are some exceptions, however. The 10-year-rule is waived if the non-spouse beneficiary is:
- A minor child of the owner.
- Disabled or chronically ill.
- No more than 10 years younger than the owner.
- A charity.
- An estate.
When reviewing your estate plan, you should be sure you review your retirement accounts and their beneficiary designations.
For more guidance on your required minimum withdrawals, consult with the custodian of your retirement account, and/or your accountant.