Do the new IRA RMD Rules offer planning opportunities?
Are you Required to take Minimum Distributions (RMDs) from your IRAs?
The end of another year is fast approaching. Let's answer some questions about IRAs and RMDs and clearly explain some recent tax law changes that may be confusing. Most of the changes were good for retirees and one was a disappointment to some beneficiaries.
You will want to know what has changed under the SECURE Act of 2019. Many retirees still are unsure of how they are impacted and are looking for help with creating a winning IRA strategy.
Let's look at the three changes that matter the most:
The most discussed change is the increase in the age at which distributions are forced upon the IRA owner.
For as long as I can remember, the RMD age was 70 1/2. If you were born in January 1950, you would have had to take a first distribution in 2020. If you were born in July 1950, you would have to take a first distribution in 2021.
Now the RMD age has increased to 72. Anyone who will turn age 72 before the end of the year has to take a distribution. And of course, an RMD is done every year after 72.
A 72-year-old, in 2022, was born in 1950. So, anyone born in 1950 or earlier has to take a RMD from their IRAs before year end. If you don't meet your RMD amount you pay a substantial penalty.
Also changed under the SECURE Act were the life expectancy numbers within the Uniform Lifetime Table. These numbers are used to calculate the amount of the RMD and as they change the amount of the RMD changes also.
First let's look at how the government calculates your RMD amount:
They use the value of your IRA at the beginning of the year and divide that value by your expected life expectancy. Everyone, regardless of their actual life expectancy, uses the same number for their age.
For example, suppose an IRA valued at $100,000 and an IRA owner who will be age 75 by year-end.
Looking at today's Uniform Lifetime Table, a 75-year-old has a life expectancy of 24.6 years.
The math: $100,000/24.6 = $4.065. The $4,065 is the RMD amount for that year for that IRA.
Life expectancies were increased under the SECURE Act. As these numbers increase, the amount of the RMD decrease. Math wizards will tell us that a larger divisor will lower the resulting answer.
How much did these changes lower the RMD amounts? Under the old rules a 75-year-old had a life expectancy of 22.9 years. Their RMD on the same $100,000 IRA would have been $4,366. About 8% more than the SECURE Act requires them to withdraw today.
That change helped retirees who did not need or want the full amount of their RMDs to supplement their Social Security, pensions, and other income.
The two changes we have just looked at helped retirees and increased their options and flexibility as they made their best Retirement Income Plan.
The other significant change under the SECURE Act made things harder for retirees to plan and financially damaging for their non-spouse beneficiaries.
Spouses can still leave their IRAs to their spouse. The rules have not changed on when and for how long distributions can be made. But eventually, IRA balances will end up in the hands of non-spouses.
It is the other four classes of beneficiaries that have been impacted.
Non-spouse individuals (usually children or other family members), Estates, Trusts and Charities are all working under new laws on when and for how long distributions are allowed.
Children are the most common secondary beneficiaries. They won't see as much lifetime value from your IRAs as they would have pre-SECURE Act. The reason we think is the government needs tax dollars sooner rather than later.
I have developed a Flow Chart that details all you need to know about IRA laws and what happens depending on who you name as beneficiary. It is a resource you'll want to keep with your other retirement planning tools.
Send us an email at Info@SeriousMoneyOhio.com and mention IRA RMD Flow Chart and we'll send the PDF to you promptly. Also mention 2022 Tax and Retirement Summary and we'll include that updated two-page reference.
You may find that it's time to revisit your beneficiary planning and consider how your IRAs can best help the people and charities that you love. We can uniquely help by being an experienced sounding board and a source of practical ideas that really matter.
As always, thank you for reading our blog.
Be well,
Fred Quinn
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