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IRA Distribution Rules Continue to Change

Just when we thought IRA distribution rules changed enough for a while with the 2019 SECURE Act, there’s more possible changes to be aware of.

RMD Tables

The new IRS life expectancy tables that took effect 1/1/22 reflect longer life expectancies (see IRS Publication 590, Appendix B for tables). It’s not only good to hear we’re living longer, but it’s also good news for retirement accounts. Overall, this means more years for required minimum distributions (RMDs) to be spread over, resulting in lower annual amounts for those subject to them. For example, where a 2022 RMD might’ve computed to $55,022 under the old tables in a particular situation, it computes to $51,220 under the new tables, or $3,802 less. You can always take more out if needed, but these updated tables reduce the amount you are required to take out, leaving you with more choice.

IRS Proposed Regulations on RMDs

The IRS proposed some regulations earlier this year to modify or clarify some of the rules that came from the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act). The SECURE Act created more complexity in the distribution rules and now they are getting even more complicated.

These regulations impact 2022 RMDs, even though they may change before they become final. Taxpayers must apply a “reasonable, good faith interpretation” of the SECURE Act rules. Compliance with the proposed regulations will satisfy that requirement.

One of the biggest changes made by the 2019 SECURE Act was to eliminate the life expectancy payout for most non-spouse beneficiaries of inherited retirement accounts and instead require the account be fully distributed by the end of the tenth year after the decedent’s year of death.

It appeared from the rules that the beneficiary could wait until the end of the 10-year period to take any distributions. That would not be the case under the proposed regulations. Annual RMDs would be required during the first nine years after death and full payout by the end of the 10th year, but only in situations where the account owner died on or after the required beginning date (date by which you are required to take your first RMD). No distributions would be required until the 10th year if the account owner died before their required beginning date.

The SECURE Act still allowed certain beneficiaries it classified as Eligible Designated Beneficiaries (EDB) to stretch distributions over their life expectancy. EDBs include your surviving spouse, your minor children, any individual not more than 10 years younger than you, and certain disabled or chronically ill individuals. Under the regulations, once an EDB dies or a minor child reaches the age of majority, annual life expectancy RMDs continue over the first nine years after the year of such an event. The balance must be fully distributed in the 10th year.

The regulations clarify these EDB categories. For instance, the age of majority is now uniformly defined to be age 21.

There are numerous changes and clarifications, including provisions for trusts and employer retirement plans, but these are some of the main provisions. The regulations likely would be finalized before year-end in some form, so stay tuned.

SECURE 2.0

Congress is proposing legislation that also would make changes to IRAs and employer retirement plans to further enhance retirement savings. The House of Representatives has passed the Securing a Strong Retirement Act bill (a/k/a SECURE Act 2.0) and the Senate is working on their version. The chambers would have to reconcile any differences. While this may cause several changes, it is also possible that nothing will happen at all. Here are some key provisions from the House version:

  • The age for a retiree to begin required minimum distributions could be pushed out further from the current starting age of 72. The RMD starting age would increase to:
    • Age 73 in 2023
    • Age 74 in 2030
    • Age 75 in 2032
  • Age 50 or older catchup contributions would increase for those age 62 through 64, as follows:
    • IRAs - Currently $1,000, would be indexed for inflation
    • Employer retirement plans – Currently $6,500 ($3,000 for SIMPLE Plans), would increase to $10,000 ($5,000 for SIMPLE plans)

The IRA distribution rules are complicated and evolving and there could be tax and penalty implications if not handled properly. If you need further guidance or have any questions on this topic, we’re here to help. Please do not hesitate to reach out to our trusted experts to discuss your specific situation.

This material has been prepared for general, informational purposes only and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Should you require any such advice, please contact us directly. The information contained herein does not create, and your review or use of the information does not constitute, an accountant-client relationship.