IRAs come with great tax advantages while you’re saving for retirement, including income tax deductions and deferral of tax on investment earnings, but, as the old saying goes, all good things must come to an end. There is an expiration date on those tax breaks. Once you reach age 72, the clock starts ticking for paying those deferred taxes. And, unlike in 2020 when the stock market dropped and Congress voted to waive 2020 RMDs, there is no waiver for 2022. RMDs generally must be taken by December 31, 2022.
If You’re Age 72 or Older
Beginning at age 72, IRA owners must begin taking annual distributions from their Traditional, SEP and SIMPLE IRAs. Roth IRAs aren’t subject to the RMD requirements during your lifetime. The amount to be distributed each year is calculated by dividing your prior year December 31 account balance by the life expectancy factor for your age in the current year. In most cases, you will use the life expectancy factor from the IRS’s Uniform Lifetime Table. The IRS recently updated all of its life expectancy tables to account for longer life expectancies. These tables are required to be used for 2022 and beyond. Using the new tables should result in smaller RMD amounts since your account balance will be divided by a greater number of years.
You have until December 31 to withdraw your entire RMD amount each year, whether you take a single payment or multiple payments throughout the year. If you just turned 72 this year, you could wait to take your RMD for 2022 up until April 1, 2023. If you wait until 2023 to take your 2022 RMD, be prepared to include two RMDs in your taxable income for 2023 because you will still be required to take your 2023 RMD by December 31, 2023.
If you don’t take your RMD when required, you will owe an additional tax equal to 50% of the RMD amount that should have been withdrawn but was left in the IRA.
Tips for Taking RMDs
- If your spouse is more than 10 years younger than you and is your sole IRA beneficiary, you can calculate RMDs using your actual ages and the IRS’s Joint Life Expectancy Table. This will result in a smaller RMD amount.
- If you have multiple IRAs, you can take your RMD for each IRA from any one or combination of your IRAs (except Roth). This can help avoid locking in losses on investments you want to retain. Some investors also allocate their investments among their IRAs so that at least one IRA has less volatile investments or enough cash reserves to cover the RMDs required each year.
- Consider taking your RMD in kind. This will allow you to transfer your investment (or a portion of it) to a taxable account, instead of liquidating it. This still satisfies your RMD because the required amount is leaving your IRA and will be a taxable distribution to you. You won’t have to pay tax on that value again. And, depending on the type of investment, future increases in value will be eligible for the long term capital gains tax rate if you hold the asset in the taxable account for at least a year before you sell it.
- If you’re still earning income, you can make annual contributions to build up cash reserves in your IRA each year, although this may increase your RMD amounts.
- While you can’t aggregate RMDs from your employer-sponsored retirement plans with your IRA RMDs, you can consolidate all your tax-qualified retirement savings in your IRAs to help build cash reserves or increase liquid investments in the IRAs. Be aware, however, that RMDs cannot be rolled over. So, the first distribution from an account each year must go toward satisfying your RMD for that account for that year. Direct transfers from IRA to IRA are not subject to this requirement.
If You Are a Beneficiary
If you inherited an IRA before 2020, you may have had the option to withdraw the inherited assets within 5 years or take a minimum payment from the inherited IRA each year based on your life expectancy. If you are taking these life expectancy payments, they are due by December 31 each year.
The beneficiary distribution rules changed beginning in 2020 following the SECURE Act of 2019. Most (but not all) beneficiaries are now required to distribute inherited IRAs within 10 years of the IRA owner’s death. The IRS proposed regulations earlier this year to help clarify the details surrounding the new rules, but the IRS’s interpretation of one of the new rules created more questions. The lack of clarification has resulted in some beneficiaries not knowing if they are required to take annual payments from their inherited IRAs in addition to depleting the entire account within 10 years. The IRS is working on final regulations to clarify these issues.
Relief: The IRS announced it will not assess the 50% penalty tax for certain beneficiary payments due in 2021 or 2022 under the proposed regulations that were not taken. This relief is available for beneficiaries who are required to follow the 10-year rule and inherited the IRA from
- An IRA owner who died in 2020 or 2021 after starting RMDs, or
- Another beneficiary who was taking life expectancy payments from the inherited IRA and died in 2020 or 2021.
If you are one of these beneficiaries and have already taken a life expectancy payment for 2021 or 2022, the relief does not allow you to put your payment back into the inherited IRA. But if you already paid the 50% penalty tax for missing the 2021 payment, you can file with the IRS for a refund.
Beneficiaries who inherited an IRA in 2020 or later and who can choose to take life expectancy payments under the new rules (e.g., spouses and chronically ill individuals) must take their annual distributions by December 31.
Now Is the Time
If you are taking an RMD from your Mainstar Trust IRA, please submit your distribution request with enough lead time to process any necessary investment transactions and make the payment before December 31.