June 2, 2022
Required minimum distributions (RMDs) can be tricky. The IRS mandates that once a person reaches a certain age – currently age 72 – they must make mandatory withdrawals from certain retirement accounts every year. Fail to withdraw the right amount of money, and the individual gets a 50 percent excise tax. Take too much, and the amount can’t be applied to a future year. Sometimes, RMDs can be delayed if the individual is still working. With some retirement accounts, calculations for RMDs are done automatically; but others, like IRAs, leave the calculations to the account owner and/or advisor. The purpose is to prevent individuals from accumulating retirement savings and never paying tax. Thus, the IRS requires annual withdrawals, which are taxable income depending on the account. With so many rules, an RMD strategy is usually needed, especially in situations where there are multiple types of retirement income.
The RMD rules are changing again, thanks to provisions in the SECURE Act of 2019. Public comments just closed on proposed regulations, and once passed, the new rules would take effect retroactively beginning January 1, 2022. The changes will impact required withdrawals from 403(b) plans, 457(d) eligible deferred compensation plans, some qualified plans like 401(k)s, and IRAs. To help clients, prospects, and others, Wilson Lewis has provided a summary of key details below.
The SECURE Act, which was passed in December 2019, overhauled the planning process and expanded access to employer sponsored plans. Among other changes, it increased the age when RMDs kick in (from 70 ½ to 72) and removed the lifetime stretch distribution timeline for certain beneficiaries in a defined contribution plan. Instead, benefits must be distributed within ten years of the participant’s death except when benefits are distributed to eligible designated beneficiaries, like the surviving spouse, child who has not yet reached majority, disabled or chronically ill individuals.
Many of these changes left questions and required further clarification.
To start, the increased age for RMDs has been clarified. Participants born before July 1, 1949, need to start taking these distributions at age 70 ½. The higher age, 72, applies to individuals born on or after July 1, 1949. Participants who reach age 72 but are still working can elect to delay RMDs until April 1 in the year after retirement.
Beneficiaries are also allowed to choose whether to apply a five- or ten-year distribution rule, or the lifetime rule. In instances where participants in a defined contribution plan begin receiving distributions but subsequently die, beneficiaries – other than eligible designated beneficiaries, discussed above – must continue to receive periodic distributions after the participant’s death. Further, the account must be liquidated within ten years after the participant dies.
An important distinction here between traditional IRAs and Roth IRAs. A Roth IRA does not require RMDs to be taken, but a beneficiary is still subject to the same ten-year distribution rule.
Proposed regulations also provide expanded guidance for RMDs in several situations, including how to:
Additionally, the proposed regulations establish required documentation for a disabled beneficiary or one with a chronic illness. The age of majority – 21 in most cases – was also clarified. Finally, actuarial increases will be required for defined benefit plans when RMDs begin after a participant reaches age 70 ½. This rule only applies to participants who are not five percent owners.
The legislation widely referred to as SECURE 2.0 passed the House in March 2022, while the Senate released a similar draft recently. Both versions take the changes in the first SECURE Act a few steps further and aim to bolster retirement savings. New employer-sponsored plans would have mandatory automatic enrollment starting at three percent of the employee’s salary, though employees could opt out.
Specific to RMDs, SECURE 2.0 would further increase the required beginning date for mandatory withdrawals. Under the House version, RMDs would increase to ages 73 in 2022, 74 in 2029, and 75 in 2032.
Comments to the proposed RMD rule changes will be discussed at a public hearing on June 15, 2022. Final regulations are expected later this year; until then, individuals can rely on the proposed guidance for planning purpose.
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The changes outlined in the proposed guidance provides much needed clarity for certain plan participants. Concurrently, plan administrators should carefully review plan documentation to determine what, if any, changes are needed to comply. If you have questions about the information outlined above or need assistance with your 401k audit, Wilson Lewis can help. For additional information call us at 770-476-1004 or click here to contact us. We look forward to speaking with you soon.