Retirement Savings: Changes to Required Minimum Distribution Rules

Tax laws control the minimum withdrawals that must be taken out of retirement accounts. Following recent legislation, important changes to timing, calculation of the withdrawal amount, and the age at which withdrawal mandates apply >may have left you with more questions than answers. What’s more, additional changes are forthcoming in tax years 2022 and beyond via the SECURE Act 2.0. With year-end fast approaching, now is a good time to determine when and how required retirement account withdrawals will affect you.

When will RMD affect me?

Retirement savings plans do not grow forever. Rather, individuals are responsible for withdrawing the required minimum distribution (RMD) starting at age 70½ if they were born on or before June 30, 1949. Due to a new rule brought about by the SECURE Act, which became law on December 20, 2019, if an individual was born on or after July 1, 1949, withdrawals do not have to be taken until the individual has reached age 72. RMDs were put into place to make certain plan owners cannot continue to defer taxation, collect retirement savings accounts, or will savings to a beneficiary as an inheritance.

RMD rules are governed by the IRS and the company that set up the retirement plans. These rules apply to IRAs (SEP, SIMPLE and traditional), 401(k) plans, 403(b) plans, 457(b) plans, profit sharing plans and other defined contribution plans. These rules do not apply to Roth IRA plans which do not require withdrawals until after the date of death of the owner. These rules also do not apply to participants of certain workplace retirement plans who are still working, and whose plan allows them to wait until April 1 of the year after they retire to start receiving distributions from those plans.

Timing & Calculation of RMD

Starting at age 59½, plan participants are generally permitted to take distributions from retirement plans free of penalty. At age 72 (70½ if born on or before June 30, 1949), federal law requires that retirees take a minimum withdrawal from their retirement savings annually. Depending on retirement plan terms, you may have the option to delay your first (and only your first) RMD withdrawal until April 1 of the next year following the year you turn age 72. For all subsequent years, the RMD withdrawal must be taken by December 31.

In tax year 2020, the CARES Act suspended RMDs. This allowed plan owners and beneficiaries to forgo required withdrawals for a single tax year. For tax year 2021, RMDs have resumed using the existing life expectancy tables. Starting with tax year 2022, the new Uniform Lifetime Table can be used by all IRA owners. The exception to this rule applies to a sole beneficiary who is both the spouse of the plan owner for the entire year and is more than 10 years younger than the spouse. In this instance, the Joint Life Expectancy Table can be used to yield a reduced RMD calculation.

For those individuals who hold more than one IRA, the RMD must be calculated for each IRA separately each tax year. The combined withdrawal amount, however, may be taken from one IRA or a portion from each IRA. Furthermore, RMDs must be calculated and withdrawals made separately for each person. Withdrawal of an RMD from a spouse’s IRA will not satisfy your individual RMD requirements.

RMD rules have changed and more changes are forthcoming. Timing of RMD withdrawals and calculation of RMD amounts are key components to tax law compliance. Individuals face penalties of 50% for failure to take their RMDs on time. Further information about RMDs can be found online at IRS.gov. For help with RMD timing or amount calculations, seek the advice of a tax professional.