Retirement Savings and Required Minimum Distributions: A Review of the Rules

Retirement savings are critical for all of us but so is following the strict laws and rules when taking distributions. Unfortunately, these rules have been changing practically every year, making what was plain old vanilla annual withdrawals now an adventure not for the faint of heart. So let’s check in and review the current rules regarding retirement plan Required Minimum Distributions to ensure you are in compliance with today’s tax laws.

If you own a traditional IRA or other similar retirement account such as a 401(k), 403(b), or qualified annuity, you may have to withdraw Required Minimum Distributions (RMDs) each year. As of 2020, the age was increased from 70 ½ to age 72 when an owner of a traditional IRA must begin to take Required Minimum Distributions. So if you are turning 72 in 2022, you will need to start taking your RMDs this year. Note that Roth IRAs do not require RMDs during the original owner’s lifetime.

RMDs are calculated based upon the IRS tables for life expectancy. In 2021, the IRS came out with new life expectancy tables with slightly increased life expectancies. The result is that, in most instances, Required Minimum Distribution amounts will be slightly less starting in 2022. Of course, you can always withdraw more than the minimum, but withdrawals are taxable income.

Inherited IRAs

Inherited IRAs are treated differently based upon 1) when the owner passed away and 2) the changes in the law 2 years ago:

• If the owner of the IRA passed away before January 1, 2020, the beneficiaries can stretch the withdrawals out over their expected lifetime. They would take Required Minimum Distributions each year based upon their life expectancy, stretching out the payments and also deferring income taxes over that period of time.
• If the owner of the IRA passed away on January 1, 2020 or later, most beneficiaries (other than a spouse) are now be forced to withdraw the entire IRA within 10 years of the owner’s death. The beneficiary will no longer be able to stretch the payments out over their lifetime nor defer the income taxes during that time.

This 10 year withdrawal requirement for inherited IRAs does not apply to beneficiaries who are surviving spouses, minor children, chronically ill, disabled, or no more than 10 years younger than the deceased IRA owner. These exempt beneficiaries can still use the prior rules that allow them to stretch out the inherited IRA.

There may be exceptions and rules that must be followed to qualify for some of the above. As always, speak to your accountant regarding your personal tax circumstances.

If you have any questions about your IRA, retirement plan or any other part of your estate plan, our experienced attorneys at Cona Elder Law are always available to address your concerns. Call us at 631.390.5000 or click here.