The rules for required minimum distributions (RMDs) recently changed when the SECURE Act was passed in 2019. Retirement accounts inherited after 2019 are now subject to a ‘10-year rule’ that requires the account to be emptied within 10 years of the death of the original owner, with some exceptions.
In early 2022, the IRS issued proposed regulations which detail its interpretation of the 10-year rule. Under this interpretation, some beneficiaries could be required to take annual required distributions in addition to the 10-year distribution requirement, in which the account must be depleted at the end of ten years.
Who must take RMDs?
In general, individuals that own a traditional IRA, or participate in a qualified retirement like a 401(k), must start minimum distributions from these accounts at age 72 (70.5 if you were born before 7/1/1949). If you are still working for the employer that maintains your retirement plan when you reach age 72, you may be able to wait until after you retire to start RMDs.
When do you have to take your first RMD?
The required beginning date for your first year is no later than April 1 of the year after you turn 72. For example, if you turn 72 on August 1, 2022, you have until April 1, 2023, to take your first RMD. They cut you some slack by giving you until April 1st for your first RMD, but after that the RMDs are due by the end of the year!
What accounts are subject to RMDs?
Traditional IRAs, Inherited IRAs, SEP IRAs, SIMPLE IRAs, and most qualified retirement plans like 401(k)s, 403(b)s, etc. Roth IRAs are not subject to RMDs during the owner’s lifetime.
What if you forget to take your RMD?
Generally, a 50% penalty applies. For example, if your RMD from your IRA is $5,000 and you forget to take it out, the penalty could be $2,500.
Under the SECURE Act, there are certain beneficiaries that can still “stretch” distributions from IRAs. These are known as eligible designated beneficiaries (EDBs) and would include your spouse, minor children, any individual who is not more than ten years younger than you, and certain disabled or chronically ill individuals.
It’s important to note that once an EDB dies or once a minor child EDB reaches age 21, any remaining funds in the account must be distributed within 10 years. No more stretching!
When you pass away, the RMD rules dictate how quickly your IRA or retirement account will need to be distributed to beneficiaries.
How does it work for non-eligible designated beneficiaries?
If you pass away before starting RMDs from your IRA or qualified retirement account, your account must be distributed entirely before or within the tenth year following your death. If you pass away after starting RMDs from your IRA or qualified retirement account, your account must continue annual distributions based on the designated beneficiary’s remaining life expectancy for the first nine years after your death. In the tenth year following your death, the remainder of the account must be distributed.
What if your beneficiary is a non-spouse EDB? Like a chronically ill individual or a sibling that is 5 years younger?
If you pass away before starting RMDs from your IRA or qualified retirement account, the required annual distribution from the account will be based on the EDB’s remaining life expectancy. If you pass away on or after the date you start RMDs, required annual distributions for a non-spouse eligible designated beneficiary will be based on the greater of a) what would have been your remaining life expectancy or b) the beneficiary’s remaining life expectancy.
Additionally, if the distributions are calculated based on what would have been your remaining life expectancy, the account must be distributed entirely by the end of the calendar year in which the beneficiary’s remaining life expectancy would have been reduced to one year or less (if you had used the beneficiary’s remaining life expectancy).
So the 10-year rule doesn’t affect my spouse who I named as beneficiary of my IRA?
Correct, the 10-year rule generally does not come in to play until the death of your spouse. Or even until the death of your spouse’s designated beneficiary.
The Big Picture
The RMD rules are incredibly complicated, and the penalties for not complying with them can be steep. At Windward, we work closely with our clients on their required minimum distributions. Not only to ensure those annual distributions are processed on time, but we help navigate the tax ramifications of those distributions, provide ongoing investment management of the IRA/retirement account, and build a big picture plan for leaving a legacy.
If you are in the Kansas City area and are looking for a fee-only, independent financial advisor to help manage your Required Minimum Distributions, contact us!
“Required Distributions: Changes You Need to Know”. Broadridge Advisor Solutions. Broadridgeadvisor.com. 28 April 2022.
This content is provided by Windward Private Wealth Management Inc. (“Windward” or the “Firm”) for informational purposes only. Investing involves the risk of loss and investors should be prepared to bear potential losses. No portion of this blog is to be construed as a solicitation to buy or sell a security or the provision of personalized investment, tax or legal advice. Certain information contained in the individual blog posts will be derived from sources that Windward believes to be reliable; however, the Firm does not guarantee the accuracy or timeliness of such information and assumes no liability for any resulting damages.
Windward is an SEC registered investment adviser. The Firm may only provide services in those states in which it is notice filed or qualifies for a corresponding exemption from such requirements. For information about Windward’s registration status and business operations, please consult the Firm’s Form ADV disclosure documents, the most recent versions of which are available on the SEC’s Investment Adviser Public Disclosure website at www.adviserinfo.sec.gov.