Calculation of minimum distributions required from IRAs and pension plans to be changed in 2022
As the year draws to a close and we celebrate with family and friends, it’s important to make sure you’ve met all of the Minimum Required Distributions (RMDs) from your IRA or pension plan. Failure to withdraw the RMD may result in a 50% penalty! It’s not a typo, 50%! Read on for bigger changes.
The IRS has released new life expectancy tables for 2022. (IRS, 2021) Each person subject to annual minimum required distributions (RMD) will be affected. Whether someone takes Lifetime RMD from their own IRA or takes RMD from a Legacy Account, the calculation of RMD will change. While most custodians will automatically implement the new tables and make the necessary adjustments internally, it is important that advisors, IRA owners and plan members understand the mechanics of these changes. Ultimately, it is the Account Owner’s responsibility to purchase the appropriate minimum required distribution.
After more than a year of waiting, the finalization [Life Expectancy] the tables will finally come into effect on January 1, 2022.
The Three Tables, despite the recent decline in overall life expectancy due to the pandemic, on average and over time life expectancies have increased. Because of this increase, the IRS felt it was time to update the existing tables, which have been in effect for two decades. Note that the new tables do not reflect the drastic changes. The increase in life expectancy factors ranges from no change for older Americans to an increase of 2.2 years for a newborn baby. However, these slight changes to the tables will result in somewhat smaller RMDs for just about everyone.
The three RMD life expectancy tables have been revised: (IRS, 2021)
- Uniform Life Table: Used to calculate Lifetime RMDs for an IRA or an account owner’s pension plan.
- Joint life expectancy table (and last survivor): used instead of the uniform life expectancy table when a spouse is the sole beneficiary of the IRA or the plan and that spouse is over 10 years of age. less than the owner of the IRA or the plan member.
- Single Life Expectancy Table: Under the SECURE Act, only used to calculate RMDs after death for âeligible designated beneficiariesâ (ie more than 10 years younger than owner / participant). The Single Life Expectancy Table is also used if an IRA owner dies after the Required Start Date (RBD) (April 1 of the year following the year the IRA owner reaches age. age 72) without naming a living beneficiary, ie the âphantom ruleâ. In addition, this table is used to calculate the annual RMD of Inherited IRAs for beneficiaries who inherited before SECURE in 2020.
The Single Life Table is never used by IRA owners or plan members to calculate required lifelong distributions. The new tables can also be used to calculate 72
The easiest change to implement is for account owners taking Lifetime RMDs based on the Uniform Lifetime Table. The uniform lifetime table is a ârecalculationâ table. This means that each year a person will return to the table to find their age and the corresponding life expectancy factor. This new factor is then divided into the account balance as of December 31 of the previous year to calculate the RMD. Since people using the Uniform Lifespan table recalculate each year, identifying the correct number is straightforward; just go to the table according to your age on December 31st of the year RMD.
For those who are (or will be) 72 in the second half of 2021, there is a potential additional layer of complexity. The old rule was that your first year of distribution was based on your age 70 and a half, now that is the year you turn 72. Congress eventually dropped the half-year. These people will have their first RMD due for 2021. However, a first RMD may be delayed until April 1 of the following year. Any first-time RMD taker who carries over the initial RMD to the following year must take two RMD that year. (IRS, 2021) For this affected group, this could result in the withdrawal of two RMDs in 2022 – one using the existing uniform lifespan table (before 2022) and the other using the new version.
As always, I recommend that you work with an experienced financial advisor when discussing your retirement planning and IRA / retirement plan distribution options. Special thanks to CPA Ed Slott and Company, LLC who provided much of this highly technical content.
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