Confusion about 2022 required minimum distributions

You don’t have to be a Jeopardy champion to know how to calculate required minimum distributions for 2022, but it may be equally challenging due to several recent tax rule changes.

First, the Secure Act raised the age at which individuals must begin to take required minimum distributions from 70½ to 72, effective for those who turned 70½ in 2020 or later. The act also eliminated the stretch IRA for most non-spouse beneficiaries, replacing it with the 10-year payout rule, which requires no annual RMDs until the end of the 10-year term.

Then came the CARES Act, which waived RMDs for 2020 (RMDs returned in 2021). On top of that, IRS issued new RMD life expectancy tables for 2022 RMDs, but the tables don’t apply for all RMDs taken in 2022.

So which tables apply for RMDs taken in 2022? It can either be the old tables, the new tables or no tables. To make it even more confusing, some will use both tables (old and new) for 2022 RMDs.

OLD TABLES AND NEW TABLES

IRA owners (or plan participants subject to RMDs) who turned 72 in 2021, but after June 30, have a required beginning date, or RBQ, of April 1, 2022, and 2021 is their first RMD year.

Some in this group may have already taken their 2021 RMD last year. If not, any part not taken in 2021 must be withdrawn by April 1, 2022. If they delayed their 2021 RMD into 2022, they must take their first two RMDs (for 2021 and 2022) in 2022.

However, for the 2021 RMD that’s due by April 1, 2022, they will still use the old RMD table (generally the Uniform Lifetime Table). Even though these individuals are taking the RMD in 2022, it’s still the 2021 RMD, so they must use the old table. Their second RMD (for 2022) is due by Dec. 31, and they must use the new table for that RMD. So anyone in this situation will use both tables (old and new) for the two RMDs they take in 2022.

NEW TABLES

Any other IRA owner subject to RMDs in 2022 will simply use the new Uniform Lifetime Table for RMDs this year, unless the spousal exception applies. That exception applies when the spouse is the sole beneficiary for the entire year and is more than 10 years younger than the IRA owner. In that case, the 2022 RMD will be calculated using the 2022 Joint Life Expectancy tables.

NO TABLES

This category would only apply to IRA beneficiaries — not owners. Under the SECURE Act, most non-spouse beneficiaries who inherited in 2020 or later will be subject to the 10-year rule. Since there are no annual RMDs, the beneficiaries don’t have to use any table. They can take whatever they want during the 10 years, as long as the entire inherited IRA or Roth IRA balance is withdrawn by the end of the 10-year term (more precisely, by Dec. 31 of that 10^th year).

Similarly, some beneficiaries are subject to the 5-year rule because they’re not considered designated beneficiaries and they inherited before the IRA owner reached his RBD. Those beneficiaries also won’t need to use any RMD table. Their inherited account balance must be withdrawn by the end of the 5-year term (actually, by Dec. 31 of that fifth year). However for this group, anyone who inherited between 2015 and 2019 got an extra, sixth year due to the waiver of 2020 RMDs. There was no such extension for those subject to the 10-year rule since that term could not have begun until 2021.

Not all beneficiaries are subject to the 10-year rule. Eligible designated beneficiaries can continue to use the stretch IRA. Their RMDs will be based on the new Single Life Table. EDBs are surviving spouses, minor children of the deceased IRA owner (but only up to the age of majority, or age 26 if they’re still in school), chronically ill or disabled beneficiaries, and non-spouse beneficiaries who aren’t more than 10 years younger than the deceased IRA owner.

In addition to EDBs, non-spouse designated beneficiaries who inherited before 2020 and were using the stretch IRA are grandfathered and can continue using their stretch IRA term for the rest of their life. They would also use the new Single Life Table.

These non-spouse beneficiaries (who still qualify for the stretch IRA), only have to go to the Single Life Table once and look up their life expectancy based on their age in the year after death. Then they simply reduce that term by one year for each future year’s RMD. (Surviving spouses can go back to the table each year to look up their life expectancy.)

But even here there’s a twist. Starting in 2022, these beneficiaries must “reset” their stretch IRA payout period to the new Single Life Table by looking up their life expectancy factor (payout period) under the new table back in the year after the IRA owner’s death. Then they subtract one year for each year since then to produce the new RMD payout term.

EXAMPLE

Pam inherited an IRA from her mother back in 2017, when she was 44. She began taking stretch IRA RMDs beginning in 2018 based on her age of 45 that year. The factor under the old Single Life Table was 38.8 years. Since then, she’s been reducing that factor by one year. For 2019, she used 37.8. For 2020, no RMD was required because it was waived by the CARES Act. But in 2021, Pam continued her RMD schedule (with no adjustment required for 2020 when the RMD was waived) using 35.8 years.

But 2022, Pam must reset her RMD schedule by going to the new Single Life Table and looking up what would have been her payout period in 2017 when she was 45. That factor is 41.0 years. She then subtracts one for each year since 2018 to produce a 2022 factor of 37.0 years (41.0 less 4 years since 2018 = 37.0 years).

MODEST TAX SAVINGS

If the balance in Pam’s inherited IRA as of Dec. 31, 2021, was $300,000, the change to the new table would save Pam the tax on $513, which at a tax rate of 22% would be $113.

Under the old table, Pam’s 2022 RMD would have been $8,621 ($300,000/ 34.8 = $8,621); under the new table, her 2022 RMD is $8,108 ($300,000/ 37.0 = $8,108), $513 less than under the old table. The savings will generally be less for beneficiaries like Pam who still qualify for the stretch IRA, since they’re usually much younger and use a longer payout period. But remember that this reset doesn’t apply to most beneficiaries, because most don’t qualify for the stretch IRA.

Furthermore, beneficiaries who inherited in 2021 and qualify for the stretch IRA (because they are EDBs) don’t have to do the reset since their first RMD is for 2022. They’ll simply look up their age in 2022 from the new Single Life Table.

Compared with most beneficiaries, IRA owners who begin RMDs at age 72 will generally save more under the new table based on their age (shorter life expectancy). That’s especially true for IRA owners with a high account balance.

Explaining all this to clients this year is definitely tougher than correctly answering a Final Jeopardy clue. Good luck!

[More: Congress, stop the madness and eliminate RMDs]

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