The end of each year in the US is known for holidays, being with family, and creating resolutions for the new year. For financial professionals, the end of the year is the time of year for Required Minimum Distributions (RMDs). An RMD is a mandated withdrawal of funds from a qualified retirement plan (401K, 403B, or IRA) after a certain age, from tax deferred accounts. Over the last four years, updated laws have changed RMDs. These changes effect the age of which owners of qualified accounts need to take RMDs, and the rules for individuals who have inherited qualified retirement accounts. We are going to take a look at a few things you need to know about RMDs and taking them this year.
With the Tax Reform Act of 1986, RMDs were created for those individuals who have been contributing to a tax deferred retirement account. When the law was passed, the age to start taking RMDs was at 70 ½ years old. This meant in the year that you turned 70 ½, individuals were mandated to take a percentage of funds, based on life expectancy, from their qualified retirement account as ordinary income until they passed away or the account reached a $0 balance. In 2019, with the passage of the SECURE ACT this changed slightly. Anyone born before 6/30/1949, had to continue taking their RMDs at age 70 ½ however, anyone born between 7/1/49 and 12/31/50 had their RMD age pushed back to 72 years old. This was further changed in 2022 when SECURE ACT 2.0 was passed. This now took RMDs back to age 73 for anyone born between 1951 and 1959, and to age 75 for anyone born after 1960.
It is important to remember, RMDs are for pre-tax or tax deferred qualified retirement accounts only. With the creation of the Roth IRA in 1997, there are no mandated RMDs for Roth accounts, except when Roth IRAs are inherited. With the Boomer generation growing older and beginning to pass away, more and more qualified accounts are being left to spouses and the next generation. With these inherited IRAs, they have their own rules that need to be followed for RMDs.
RMD rules regarding inherited IRAs differ depending on who is the beneficiary. If a spouse inherits a tax deferred or Roth IRA, the surviving spouse is allowed to transfer the money of the descendant to an IRA in their own name. This allows the surviving spouse to wait until they are RMD age to begin taking RMDs for tax deferred accounts and have no required RMDs for Roth accounts.
For a non-spouse that inherits a tax deferred or Roth IRA before 2020, they will have to take RMDs stretched out over their lifetime based on their own life expectancy. For all both tax deferred and Roth IRAs inherited after 2020, non-spouse beneficiaries are required to liquidate the account after the 10th year following the death of the IRA owner.
With all the different changes to the RMD rules over the last few years, RMDs are affecting families now more than ever before. Having a plan of how and when to properly take RMDs can make a difference in how assets are efficiently distributed and passed on to the next generation. Let us know your plan for taking RMDs this year!
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
Article Sources
https://www.schwab.com/ira/inherited-and-custodial-ira/inherited-ira-withdrawal-rules
https://investor.vanguard.com/inheriting-accounts/rmd-rules-for-inherited-iras