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    Patchwork Of New Rules Govern Required Distributions From Retirement Plans

    Under the tax law, retirement plan participants and IRA owners who have reached age 72 must take payments, called required minimum distributions (RMDs), out of their plan accounts each year. The first required distribution must be made by April 1 of the calendar year following the calendar year in which the employee or IRA owner reaches age 72. Thereafter, the individual must take the required minimum distribution by December 31 of each year. 

    That is the general rule, but over the last 3 years, Congress has changed the rules several times in Covid relief bills. Even more, changes are included in the Build Back Better plan that is pending in Congress. The rapid pace of changes has left many taxpayers uncertain about which rules applied to them last year and what happens in 2022. 

    Below is a description of the state of RMDs for the last few years and a look ahead to possible changes this year. 

    2019-2020

    Late in 2019, Congress passed provisions of the SECURE Act, “Setting Every Community Up for Retirement Enhancement Act of 2019”, as part of a large government funding bill. That Act changed the age at which taxpayers are required to take RMDs from 70½ to age 72, or, if later, the year they retire. However, if the retirement plan account is an IRA or the account owner is a 5% owner of the business sponsoring the retirement plan, the RMDs must begin once the account holder is age 72, even if they are still working. RMD amounts not withdrawn from accounts on time may be subject to hefty penalties. These rules took effect in 2020.  

    Later, RMDs were waived for the calendar year 2020 by the CAREs Act. This meant that individuals who reached 70½ in 2019, (70th birthday was June 30, 2019, or earlier) did not have an RMD due for 2020 but had to take one by December 31, 2021. 

    2021

    For 2021, the rules on RMDs are the usual rules that apply to taxpayers based on when they turn 72. Again, individuals who were required to take their first distribution in 2020 were able to defer that until December 31, 2021. 

    Individuals who reached 72 in 2021 (and their 70th birthday was July 1, 2019, or later) have their first RMD due by April 1, 2022. 

    2022 and Beyond

    The House-passed version of the Build Back Better plan pending in Congress would make the following changes to the RMD rules for high-wealth taxpayers, and it appears the Senate version retains these provisions.  

    • Requires higher minimum distributions when retirement accounts exceed $10 million in the prior year. 
    • Minimum distribution is 50% of the amount by which the individual’s prior year aggregate traditional IRA, Roth IRA and defined contribution account balance exceeds the $10 million limit.
    • An additional amount is required to be distributed to bring accounts down to $20 million. 
    • The provision would take effect in 2029.

    How RMDs Apply to Different Types of Plans

    The required distribution rules apply to: 

    • Owners of traditional Individual Retirement Arrangements (IRAs).
    • Owners of traditional Simplified Employee Pension (SEP) IRAs.
    • Owners of Savings Incentive Match Plans for Employees (SIMPLE) IRAs.
    • Participants in various workplace retirement plans, including 401(k), Roth 401(k), 403(b) and 457(b) plans.
    • Roth IRAs do not require distributions while the original owner is alive.

    An IRA trustee, or plan administrator, must report the amount of the RMD to the IRA owner. An IRA owner, or trustee, must calculate the RMD separately for each IRA owned. However, they can choose to withdraw the total amount from one or more of the IRAs. In contrast, RMDs from workplace retirement plans must be taken separately from each plan.  

    How RMDs are Calculated

    For IRAs and defined contribution plans, the required minimum distribution for each year is determined by dividing the account balance as of the end of the prior year by the number of years in the distribution period, the taxpayer’s life expectancy. For most taxpayers, the life expectancy used to calculate the RMD is based on Uniform Lifetime Table III in IRS Publication 590-B, Distributions from IRAs. 

    Example: 

    You own a traditional IRA. Your account balance at the end of 2020 was $100,000. You are married and your spouse, who is the sole beneficiary of your IRA, is 6 years younger than you. You turn 75 years old in 2021. Your distribution period is 22.9 using the table. Your required minimum distribution for 2021 would be $4,367 ($100,000 ÷ 22.9). 

    Trustees use Form 5498, IRA Contribution Information, to report RMDs to the recipient.  

    Conclusion

    When you take an RMD, it usually represents taxable income. Not taking a required distribution, or not withdrawing enough, could mean a 50% excise tax on the amount not distributed. For these reasons, taxpayers need to get it right when taking their RMDs. Consult your tax adviser to help you plan for the tax traps that can apply to retirement plan distributions. 

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