The New IRA Rules on Required Minimum Distributions

On February 24, 2022, the IRS issued the long-awaited proposed tweaks in response to the SECURE ACT of 2019. To a large part, the new proposal affects the required minimum distribution (RMD) and how people save and access retirement savings.  

First, if you have an IRA or 401(k) that’s either your own or one you inherited, you probably understand that, at some point, the IRS will force you to start making withdrawals. You also probably know that there are rules about when you must start, the bare minimum you can take out, and how fast you must finish. The problem is that since December 2019, these RMD rules have gotten a lot more complicated, especially in early 2022. The proposed changes maintain the rule that allows a retiree’s savings to be distributed over the designated beneficiary’s life expectancy. However, that rule only applies if the designated beneficiary is an “eligible designated beneficiary.” The other rules you should probably keep tabs on include the waiver of 2020 RMDs, the increase in the required beginning date for RMDs to age 72, the 10-year payout rule for most non-spouse beneficiaries, and the tax implications for the inherited beneficiaries. 

Taxes and The Required Minimum Distributions

Required minimum distributions are amounts the IRS requires you to withdraw from tax-advantaged accounts such as 401(K) or Roth IRAs upon reaching age 72. The required withdrawal for the minimum distribution depends on your life expectancy, the account balance as of December 31 of the prior year, as well as other factors. Although it’s up to you to make sure you’re withdrawing the correct amount, your withdrawals will be taxed at your ordinary-income tax rate. This means that the mandatory distributions can cause taxes to increase sharply. Moreover, failing to take the required amount on time can be problematic, as it can trigger a penalty of 50% of the amount you failed to withdraw. The good news is that with some careful planning, there may be ways to reduce what you pay in taxes on most tax-advantaged accounts.