Current tax law requires that owners of most retirement accounts, such as traditional IRAs, 401(k) plans, Roth 401(k) plans, other employer plans and certain inherited IRAs, must withdraw a minimum amount each year from these accounts (and recognize any corresponding taxable income) after reaching age 72.
The money withdrawn from the owner’s account each year is called the “required minimum distribution” or RMD, and the IRS uses life expectancy tables for the account owner or beneficiary to calculate the RMDs. These tables, which the IRS had not changed since 2002, were recently updated to reflect the fact that people are living longer.
The New Tables
The new tables apply to account owners calculating their lifetime RMDs in 2022 and beyond, as well as to all beneficiaries who inherit IRAs from account owners dying in 2021 and beyond. The new tables actually result in a small tax savings for some account owners by permitting a longer income tax deferral of the difference between the previous RMDs and the new RMDs. For example, an account owner with $1,000,000 in IRAs who falls in the 37% tax bracket would reduce their RMD by about $2,100 and save roughly $777 in taxes in 2022.
While custodians and plan administrators are required to calculate and notify account owners of their annual RMDs, they are not required to calculate the RMDs for beneficiaries of an inherited IRA. If you calculate your own RMD, be aware of the new tables. Note that taxpayers who withdraw more than the RMD are not affected by the new tables.
The IRS also provides transition rules for beneficiaries who inherited IRAs from account owners who died before 2021. For those beneficiaries with RMDs calculated based on life expectancy, the transition rules will provide them with an opportunity for a “reset” of their RMDs when they calculate their first RMD in 2022 using the new tables. To determine the new RMD, a beneficiary will use the new tables to locate the factor for their age in the year following the account owner’s death and then subtract one for each year that has passed since the year following the original owner’s death.
Inherited IRAs and the SECURE Act
After the SECURE Act went into effect in 2020, many IRA beneficiaries were suddenly subject to the “10-year rule,” instead of being able to withdraw the IRA over their remaining lifetime. Most practitioners initially believed that the 10-year rule would not have annual RMDs based on life expectancy, but instead would only require that the beneficiary withdraw the entire account balance of the IRA by the end of the tenth full calendar year following the account owner’s death. Only a limited number of “eligible designated beneficiaries,” such as a spouse and minor children, would require an annual RMD based on their life expectancy.
However, on February 23, 2022, the IRS released its long-awaited proposed regulations implementing the changes made by the SECURE Act. These proposed regulations DO appear to mandate annual RMDs in the first 9 years of IRAs subject to the “10-year rule” and inherited from account owners age 72 and older. This annual RMD is calculated based on a beneficiary’s life expectancy, with the RMD of the tenth and final year being 100% of the remaining account balance at that time.
RMDs in 2022
The new IRS life expectancy tables have been implemented and should be used to calculate, in 2022 and beyond, all lifetime RMDs and those RMDs for inherited IRAs that are based on the beneficiary’s life expectancy. Your Warner estate planning team is analyzing the many other clarifications and changes contained in the proposed SECURE regulations and will provide a complete summary of those developments. Contact your Warner estate planning attorney or Sara Nicholson at 269-276-8131 to learn how the new life expectancy tables and proposed SECURE Act regulations will affect your accounts and estate plan.