Q: I heard that the RMD rules have changed. That’s right? – Kenny at Memphis A .: Have the RMD rules changed? Yes, they have changed, they will change again in 2022 and they can change again after that. Last year, in response to COVID-19, the CARES Act waived the required minimum distributions (RMDs) for 2020. So the first change is that RMDs are back for 2021 under the rules that were in effect in early 2020.
You may recall that 2020 started with a couple of notable changes from the previous RMD rules in the SECURE Act of 2019. First, the age at which RMD is applied for the first time was changed from 70½ to 72 years. Second, with the exception of some types of beneficiaries such as spouses, the so-called “stretching” capacity of beneficiaries who inherit retirement accounts was eliminated. Instead, there was a new 10-year payment requirement. The new 10-year rule applies only to beneficiaries of people who die in 2020 or later. Beneficiaries of people who died in 2019 or earlier can continue to receive distributions under the old rules. Beneficiaries can take what they want from the account whenever they want after inheriting with a single requirement. The entire account must be emptied at the end of the 10th year after the year of the original owner’s death. By 2022, due to increased life expectancy, the IRS published new tables for the three life expectancy tables that affect the RMD. This will mean smaller lows next year than expected based on current scales, and therefore less tax on those retirees. For example, under the new scale, that first RMD will be 6.57% smaller for someone turning 72 in 2022 than it would be if there had been no change from the IRS. Regarding future changes, there is interest in Congress to increase the age of onset of the RMD to 75 years. In October, a bill was introduced with bipartisan support for the idea. We will have to wait to see how the legislative process goes. Sometimes broad support means quick passage, but many equally popular provisions, such as IRA Qualified Charitable Distributions, took years to become law. It is very important to be aware of these rules. Failure to take a required minimum distribution causes a penalty of 50% of the deficit, one of the most severe penalties in the tax code. If your RMD is $ 50,000 and you lose it, you owe a $ 25,000 penalty in addition to the taxes owed on the distribution it takes to fix the deficit. Oh! If you have a question for Dan, please email him with “MarketWatch Questions and Answers” in the subject line. Dan Moisand is a financial planner at Moisand Fitzgerald Tamayo serving clients across the country, but with offices in Orlando, Melbourne, and Tampa, Florida. Your comments are for informational purposes only and are not a substitute for personalized advice. Consult your advisor on what is best for you. Some questions are edited for brevity.