If you have a tax-deferred retirement account, such as an IRA or a 401(k), you'll want to keep tabs on changing rules for required minimum distributions, or RMDs -- more changes are coming for 2022.
What's changed recently?
Beginning in 2020, the age for taking initial RMDs (described by the IRS as "the minimum amount you must withdraw from your [retirement] account each year") moved from 70 1/2 to 72 through the Setting Every Community Up for Retirement Enhancement (SECURE) Act, which was passed at the end of 2019. Suddenly, when you were born in 1949 mattered -- being born in the first half of that year (prior to July 1) meant you were under the old rule of 70 1/2, while a second-half birth meant you were under the new SECURE Act provision and could wait to take your first RMD until age 72.
If that wasn't challenging enough for RMDs, next came the pandemic-inspired Coronavirus Aid, Relief and Economic Security (CARES) Act, which suspended all RMDs for 2020. However, since that law wasn't passed until late March of 2020, it meant that those who had already taken their 2020 RMDs earlier in the year asked a lot of questions about what to do next. Eventually, the IRS issued Notice 2020-51 (tinyurl.com/77yc2ref), which allowed RMD monies that were withdrawn to be redeposited if it was done by Aug. 31, 2020.
When 2021 arrived, RMDs returned to "normal" under the SECURE Act, although questions arose for many people about how to fill out tax forms for the 2020 tax year to correctly record the return of RMDs to their accounts.
What's new for 2022? How about a change involving the divisors used to calculate withdrawals from tax-deferred retirement accounts.
Why are they changing? Presidential Executive Order 13847, issued in 2018 (tinyurl.com/428ckss4), called for the secretary of the Treasury to review "the life expectancy and distribution period tables in the regulations on required minimum distributions from retirement plans ... and determine whether they should be updated to reflect current mortality data." Subsequently, the IRS and the Treasury Department said the tables required updating to "generally reflect longer life expectancies," according to the Nov. 12, 2020, Federal Register (tinyurl.com/493tu8p4).
How substantial is that change for the divisors? In 2021, the divisor for a 74-year-old single person, using the Uniform Lifetime Table, was 23.8. In 2022, a 74-year-old single person, using the newly revised Uniform Lifetime Table, will have a divisor of 25.5. In general, a higher divisor means less will be taken out of the account.
How do the two compare?
Assume "Carol's" IRA was worth $500,000 at the end of 2020. She is 74 in 2021. Her 2021 RMD would be $21,008 ($500,000 divided by 23.8).
If 2022 divisors had been in place, her RMD would have been lower. Using the same account value of $500,000, divided by the new divisor of 25.5, results in an RMD of $19,608, instead of $21,008 under the 2021 table.
Now, let's look at divisors for a 92-year-old single person.
Assume "John's" IRA was worth $500,000 at the end of 2020. He is 92 in 2021. His 2021 RMD would be $49,020 ($500,000 divided by 10.2). If 2022 divisors had been in place, his RMD would have been $46,296 (new divisor of 10.8).
You can find the new tables used to calculate RMDs at regulations.gov (tinyurl.com/y6yt3f39). Normally, the tables would be available as part of IRS Publication 590-B, but that document has not yet been updated for 2022.
The above examples are general guidelines to illustrate the changes. RMDs can be complicated. There are numerous factors that go into calculating them, including what types of accounts you have and which table you should use given your situation. The IRS provides information about RMDs on its website (tinyurl.com/59maee58) -- that's a start. But the best advice I can offer is that before you proceed with any RMDs, consult your tax adviser about your personal situation.
Julie Jason, JD, LLM, a personal money manager (Jackson, Grant Investment Advisers Inc. of Stamford, Connecticut) and award-winning author, welcomes your questions/comments (email@example.com). Please visit www.juliejason.com.
DISTRIBUTED BY ANDREWS MCMEEL SYNDICATION