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The Latest RMD Rules: What You Need to Know

By February 15, 2022March 10th, 2022No Comments

Individuals who invest in tax-deferred retirement accounts will appreciate two recent changes to required minimum distribution (RMD) rules.

First, legislation that was 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. Keep in mind that missing RMD deadlines is costly: the IRS levies penalties totaling 50% of the shortfall.

Second, in Januarythe IRS updated the life expectancy table. Because RMDs are calculated based on life expectancy and other factors, this change means you could take a smaller distribution from tax-advantaged retirement accounts, such as a 401(k).

The benefit of these two changes to RMDs is that you can keep more of your money at work in tax-deferred accounts longer.

Accounts That Do and Don’t Require RMDs

Profit-sharing plans, 401(k) plans, 403(b) plans, 457(b) plans, traditional IRAs and IRA-based plans such as SEPs, SARSEPs, SIMPLE IRAs and Roth 401(k)s all require that you take an RMD.

Roth IRAs do not require an RMD. 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are 59½ or older and have owned at least one Roth IRA for at least five years, the money rolled to the Roth IRA can be withdrawn tax free.

As always, if you have multiple qualified retirement accounts, you can use discretion about where you draw the RMD from. If all your accounts are IRAs, you can take the total RMD from one IRA or multiple IRAs. The rules for those who own multiple 401(k) accounts are more rigid: you must calculate and take each account’s RMD separately.

Example of How Life Expectancy Changes an RMD

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). 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

Taxes Owed on RMDs

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.

How Charitable Contributions Can Help

If you’re dreading the tax bite, consider using qualified charitable contributions (QCDs) to satisfy your RMD. Individuals can contribute up to $100,000 per year ($200,000 for married couples) to a single charity or divide the amount among multiple charities. A QCD strategy enables taxpayers to support charities while reducing their current taxable income.

It’s important to carefully follow IRS rules when using a QCD strategy. For example, you must instruct your IRA custodian make QCD funds directly payable to the charity or charities you designate. You can’t direct distributions to donor-advised funds (DAFs), as they do not qualify under QCD rules. It’s highly advisable for those using QCDs work with their wealth team.

Work With Your Wealth Team

RMD rules are rife with exceptions. For instance: If you’re 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 your first distribution from your employer’s retirement plan. You’ll still need to take an RMD from traditional IRAs.

Because of the potential complexities involved with both RMDs and QCDs, we recommend that you consider working with your wealth advisor and tax professional.


1“New Year, New Life Expectancy Tables” 

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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