What are the new RMD rules?
Have RMD rules changed?
Required Minimum Distributions (RMD) are back in 2021 after a one year COVID-related waiver in 2020. No changes were made this year to the Required Minimum Distribution (RMD) rules for IRAs, 401(k)s, 403(b)s and other retirement accounts but changes are coming in 2022.
To determine the RMD for a given year, you take the account balance as of December 31st of the prior year and divide by a factor in an IRS table. There are three tables. Most people will use the Uniform Lifetime Table, but anyone married to someone more than ten years younger than themselves uses the Joint and Last Survivor Table. Beneficiaries of Inherited IRAs eligible to use the so-called “stretch” method, use the Single Life Table and a different methodology.
All three 2022 tables can be found here https://public-inspection.federalregister.gov/2020-24723.pdf. The Single Life Table starts on page 20. The Uniform Lifetime Table starts on page 25 and the Joint and Last Survivor Table starts on page 27.
For 2022, all three tables will be updated to reflect longer life expectancies. An IRA owner age 75 on Dec 31, 2022 using the Uniform Lifetime Table would have divided their December 31, 2021 balance by 22.9 under the old regime. Under the new table, they divide by 24.6. This results in an RMD almost 7% less had the IRS not update the tables.
…the dollar amount of the RMD in 2022 may still be higher than the 2021 RMD despite this favorable change.
We should note, however that the dollar amount of the RMD in 2022 may still be higher than the 2021 RMD despite this favorable change. Remember, your 2021 RMD is based on the value of the account on December 31, 2020, but your 2022 RMD is based on your December 31, 2021 account value. If the 75 year old in our example above has an IRA that grew by enough, the RMD in 2022 will still exceed the 2021 RMD despite the new table.
While the RMD for an Inherited IRA or retirement account is also based on the year-end balance of the prior year, the methodology applied to the factor from the Single Life Table is different.
For example: With a few exceptions, beneficiaries of persons dying in 2020 or later are generally subject to a 10-year rule, not an RMD. Assume an IRA owner died in 2017 and left his IRA to his sister who was 67 at the end of 2017. Since he died prior to 2020, she may utilize the “stretch” method. The sister became subject to RMD starting in 2018. She uses the December 31, 2017 account balance and divides by 18.6, the factor for a 68 year old, her age at the end of 2018.
From that point, she simply reduces the original factor 18.6 by one every year and applies that to the prior year balance. Her 2019 RMD would therefore be the December 31, 2018 balance divided by 17.6. and her 2022 RMD would have been the December 31, 2021 balance divided by 14.6.
With the new tables for 2022 and beyond, she needs to recalculate the divisor as if the new 2022 table was in effect in 2018 when she started her RMD. The new factor for a 68-year-old is 20.4 and would have applied for her 2018 RMD. Therefore, reducing by one each year since leads to a factor of 16.4 for 2022.
We calculate RMD and monitor compliance for our clients because failing to take all of a RMD can be costly. The penalty is one of the stiffest in the tax code – 50% of the shortfall. If your RMD is $50,000 and you only take $30,000, you are short $20,000 and will owe a $10,000 penalty in addition to the taxes applicable when that $20,000 is finally distributed. Ouch!
Making News…
We continue to help the Orlando Sentinel with reader questions by participating in a free call-in hotline and its Ask An Expert feature. (Some links may require a subscription to view.) Mike Salmon, CFP®, Derrick Chandler, CFP®, and Tommy Lucas, CFP® participated in and answered questions from callers. The hotline coverage was picked up by Yahoo News as well.
Tommy Lucas, CFP® EA
Mike laid out the importance of having proper estate planning documents in place. Derrick explained that it is possible to convert a term insurance policy into a permanent policy under certain conditions. Tommy Lucas, CFP® discussed some of the considerations for those on an income-based repayment program for student loan debt.
Ryan Osborne, CFP® served as an expert for a MoneyGeek.com piece for young adults, Beginner’s Guide To Credit Card Basics & How They Work
DJ Hunt, CFP® wrote an essay for Rethinking65 about the parallels he sees between what it takes to succeed at two of his passions, financial planning and martial arts in Advisor Finds Financial Planning is Like Martial Arts
Dan Moisand,CFP® continues to write for MarketWatch, Florida Today, and Financial Advisor. Click on the links to read some of his published articles:
I withdrew money from my IRA during Covid. How can I pay it back?
I inherited annuities from my dad — how can I avoid being double taxed?
What are the tax rules around inheriting an annuity?
My father left part of his IRA to my brother, but my brother died before inheriting. Now what?
I contributed too much to my IRA and Roth IRA — what now?
When is it a bad idea to roll over an IRA to a spouse?
Do spouses have special rules when it comes to inheriting an IRA?
What do I need to know about required minimum distributions?
You’re at that magic age of ‘required minimum distribution’: There’s lots to figure out
In the News…
Dan spoke at the Fall conference of the National Association of Personal Financial Advisors in Boston in October. He presented “Real World Rebalancing” a talk about how rebalancing works, what it does and does not provide and unique quirks that presented themselves during the “Corona-crash” of 2020.
On various dates in October and November, Mike Salmon gave two webinar presentations to commercial real estate (CRE) brokers at Greysteel, spoke at the annual conference for CRE brokerage firm Franklin Street in Tampa, and gave a presentation to CRE brokers at Marcus and Millichap in Jacksonville.
If you are a member of a professional or civic group in need of a personal finance speaker, we are happy to talk with your group’s organizers about helping out at no cost.
Charlie Fitzgerald, CFP® added some commentary on a piece for CNBC on a new fund that buys bitcoin futures. Charlie noted that the expenses on the fund were high and that the futures contracts the fund buys may not result in a fund that follows the price of bitcoin.
Things We Found of Note
“More than 90% of the S&P and Nasdaq has had at least a 10% drawdown this year, with the average being minus 18% for the S&P and—get this—a whopping minus 38% for the Nasdaq.”
We all know Florida is a great place to retire. A lot of other people seem to think so as well. U.S. News & World Report: Fla. Has 8 of Top 10 ‘Best Retirement’ Metros
