Required Minimum Distribution Rules Explained

Required Minimum Distribution Rules Explained

In general, excluding Roth IRAs, retirement plans, including Self-Directed IRAs and Solo 401(k) plans are subject to required minimum distributions (RMDs). The RMD rules are contingent on many aspects, including the person or party that is responsible to take the RMD.

Key Points
  • RMDs are required for most retirement accounts once you reach age 72
  • The SECURE Act upped the required beginning date from 70 1/2 to 72
  • Proposed legislation may confuse beneficiaries on how they must distribute the retirement account

The 2019 SECURE Act

On December 20, 2019, the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 was enacted as part of the Further Consolidated Appropriations Act of 2020.  The SECURE Act is the most important retirement legislation since the Pension Protection Act of 2006.

The intent of the SECURE Act is to make retirement plans more easily accessible to employees and less burdensome for employers

Prior to the SECURE Act, any pretax IRA holder or 401(k) plan participant that turns 70 1/2 was required to take an RMD annually.  For spousal beneficiaries, the surviving spouse would have the option to elect to have the retirement account re-named into his or her name. In the case where the IRA owner died prior to the Required Beginning Date (RBD), the designated beneficiary was able to choose between taking the entire amount of the retirement account as an RMD over five years or based on the life expectancy rule.  Whereas, if the retirement account holder died on or after the RBD, the amount of the RMD was based off Life Expectancy Table based on the longer of the beneficiary life expectancy.

However, under the SECURE Act, the required beginning date changed from age 70 1/2 to 72.  The reason for the change is that Americans are working and living longer, and Congress wanted to give Americans more time to save for retirement.

Current RMD Rules

The RMD for the year in which the plan participant reaches the age of 72 must be taken by April 1st of the following year. This deadline is known as the participant’s required beginning date (RBD). It’s important to keep in mind, the the 2nd RMD will be do during that same year. Therefore, it may make sense to take your first RMD before the end of the year in which you turn 72. Otherwise, you’ll have to remember to take two distributions the second year.

In ensuing years, the RMD must be taken by December 31st of the year to which the RMD applies. For example, if you turned 72 in 2022, your first RMD is not required until April 1, 2023. Your second RMD will be due by December 31, 2023.

In the case of a current 401(k) plan participant, where one owns less than 10% of the company, the RMDs can be deferred past age 72 until retirement. In this instance, the RBD would be April 1 of the year that follows the year in which the 401(k) plan participant retires from working with the plan sponsor.

Calculating the RMD Amount

Generally, an RMD is calculated for each account by dividing the prior December 31 balance of that IRA or retirement plan account by a life expectancy factor that the IRS publishes in Tables in Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs).

Note – an IRA owner must calculate the RMD separately for each IRA that he or she owns, but can withdraw the total amount from one or more of the plans. Even though the IRA custodian or retirement plan administrator may calculate the RMD, the account owner is ultimately responsible for calculating the amount of the RMD.

New RMD Rules under The SECURE Act

The SECURE Act changed the RMD options for beneficiaries that inherit retirement accounts after 2019. Below are the two significant RMD rule changes to be aware of:

  1. Reduced the maximum RMD period for a designated beneficiary to 10 years, where the inherited account must be fully distributed by the end of the 10th year that follows the year of the account owner’s death.
  2. Added a new class of beneficiary called an eligible designated beneficiary. The Act provided that an eligible designated beneficiary may take distributions over their life expectancy when the account owner dies before the RBD. The SECURE Act defines an eligible designated beneficiary as a designated beneficiary who, at the time of the account owner’s death, is:
  • the surviving spouse of the account owner
  • a child of the account owner who has not reached the age of majority
  • disabled
  • a chronically ill individual, or
  • an individual not described in any of the preceding who is not more than 10 years younger than the account owner.

The RMD Proposed Regulations

Most of the provisions in the SECURE Act went into effect on January 1, 2020. However, proposed RMD changes, which were released on February 23rd of this year, would not be until January 1, 2022.

The preamble to the proposed regulations states that taxpayers must apply the existing regulations and exercise a “reasonable, good faith interpretation” of the increased RMD age, and 10-year rule created by the SECURE Act.

However, until the RMD regulations are finalized, there is still some uncertainty on the practical application of the RMD rules under the SECURE Act.

Understanding the Proposed RMD Regulations

It was believed that when the SECURE Act was passed that non-eligible designated beneficiaries would be subject to the 10-year rule. In addition, it also provided that this 10-year rule applies regardless of whether the account owner had started RMDs at the time of death.

In addition, it was believed that a designated beneficiary may choose whether to take RMDs for the first nine years after the year in which the account owner died, but must fully distribute the inherited account by the end of the 10th year. In other words, it was believed that the SECURE Act allowed a non-spousal beneficiary to deplete the IRA within ten years how he or she saw fit.

However, the proposed regulations described that while this is so when the account owner dies before the RBD, annual RMDs must be taken when the account owner dies on or after the RBD. As a result, the distribution options for a post-2019 designated beneficiary are as follows:

Account Owner Dies Before the RBD

The beneficiary may choose to take distributions during the first nine years that follows the year in which the account owner died. The account must be fully distributed by the end of the 10th year.

Example: Amy dies in 2022 before her RBD. Amy’s beneficiary is her 58-year-old sister Jen. Jen was not disabled or chronically ill at the time of Amy’s death. Jen is more than 10 years younger than Amy. Therefore, she is a designated beneficiary, but not an eligible designated beneficiary.  Hence, Jen may withdraw any amount each year until December 31, 2031. She must withdraw the entire balance by the end of 2032.

Eligible Designated Beneficiary

An eligible designated beneficiary who inherits a retirement account from someone who dies before the RBD has the option to choose one of the following:

  1. The 10-year rule, where distributions are optional for the nine years that follow the year in which the account owner dies, or
  2. The life expectancy rule where distributions are taken over the single life expectancy of the eligible designated beneficiary. These distributions must begin by December 31 of the year that follows the year in which the account owner died. Whereas, if the beneficiary is the surviving spouse of the account owner, distributions must begin the later of:
  • December 31 of the year that follows the year in which the account owner died, and
  • December 31 of the year in which the account owner would have reached age 72.

Account Owner Dies On or After the RBD

The beneficiary must take annual RMDs over their life expectancy beginning by December 31 of the year that follows the year in which the account owner died.  In addition, the account must be fully distributed no later than the end of the 10th year or the end of the beneficiary’s life expectancy, whichever is earlier.

Example: Ben dies in 2022 after his RBD. Ben’s beneficiary is his 64-year-old sister Becky. She was not disabled or chronically ill at the time of Ben’s death. Since Becky is more than 10 years younger than Ben she is a designated beneficiary, but not an eligible designated beneficiary. Becky must take distributions from the inherited account over her single life expectancy, beginning by December 31, 2023. The entire balance must be depleted by the end of 2032.

Eligible Designated Beneficiary

An eligible designated beneficiary who inherits a retirement account from someone who died on or after the RBD must take annual RMDs beginning by December 31 of the year that follows the year in which the account owner dies. This RMD is based on the longer of the life expectancy of the decedent or the beneficiary.

While this is a carryover from the current regulations, it includes a kink that punishes older beneficiaries by requiring that the inherited account must be fully distributed by December 31of the year in which the beneficiary’s life expectancy would be equal to or less than one—even if the life expectancy of the decedent is longer and therefore is used to calculate the beneficiary’s RMDs.

Example: Dan died in 2022 at age 75, which is after his RBD. Dan’s life expectancy would be 14.8 (determined in 2022). His beneficiary is his 80-year-old cousin, Pam. Her life expectancy is 11.2, determined in 2022. She is an eligible designated beneficiary because she is not more than 10 years younger than Dan.

Because Dan’s life expectancy is longer than Pam’s, his life expectancy is used to calculate Pam’s annual RMDs. Yet even though Dan’s life expectancy is used to calculate Pam’s RMDs, the inherited account must be fully distributed in the year that Pam’s life expectancy would have been less than or equal to one.

Using the non-recalculated method of subtracting one from 11.2 for each subsequent year, the account must be fully distributed in the 11th calendar year after the year of Dan’s death, when Pam would reach age 91 and her life expectancy would be less than or equal to one.

Why are the New RMD Rules So Confusing?

The IRS waited almost twenty years to publish new RMD rules and somehow made the rules even more confusing than the pre-SECURE Act rules.  When that was was passed, it was believed that the RMD rules would be simplified by imposing a flat ten-year rule for all RMD distributions.

However, the proposed regulations which were released earlier this year added even more confusion to the already complex RMD rules.   This article attempted to clarify and explain the proposed RMD rules as per the recently released regulations.  Final regulations are expected to be released in the coming months that will hopefully simplify the RMD rules based on public comments the IRS received. 

This article will be updated once the final RMD rules have been released to the public.

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