Required Distributions: Changes You Need to Know
The Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act) changed the rules for taking distributions from retirement accounts inherited after 2019. The so-called 10-year rule generally requires inherited accounts to be emptied within 10 years of the original owner’s death, with some exceptions. Where an exception applies, the entire account must generally be emptied within 10 years of the beneficiary’s death or within 10 years after a minor child beneficiary reaches age 21. This reduces the ability of most beneficiaries to spread out, or “stretch,” distributions from an inherited defined contribution plan or an IRA.
In 2022, the IRS issued proposed regulations that interpreted the revised required minimum distribution (RMD) rules. Final regulations have now been issued and are generally applicable starting in 2025. They basically adopt the proposed regulations, while reflecting some changes made by the SECURE 2.0 Act of 2022 and including certain changes in response to comments received on the proposed regulations. Under these regulations, some beneficiaries could be subject to annual required distributions as well as a full distribution at the end of a 10-year period. Account owners and their beneficiaries may want to familiarize themselves with these changes and how they might be affected by them.
RMD basics
If you own an individual retirement account (IRA) or participate in a retirement plan like a 401(k), you generally must start taking RMDs for the year you reach your RMD age. RMD age is 70½ (if born before July 1, 1949), 72 (if born July 1, 1949, through 1950), 73 (if born in 1951 to 1959), or 75 (if born in 1960 or later). If you are still working for the employer that maintains the retirement plan, you may be able to wait until the year you retire to start RMDs from that account. Failing to take an RMD can be costly: a 25% penalty tax (50% prior to 2023) generally applies to the extent an RMD is not made.
The required beginning date (RBD) for the first year you are required to take a lifetime distribution is no later than April 1 of next year. After your first distribution, annual distributions must be taken by the end of each year. (Note that if you wait until April 1 to take your first-year distribution, you will have to take two distributions for that year: one by April 1 and the other by December 31.)
Lifetime distributions are not required from Roth accounts and, as a result, Roth account owners are always treated as dying before their RBD. Prior to 2024, these two special rules for Roth accounts applied to Roth IRAs, but not to Roth employer retirement plans.
When you die, the RMD rules also govern how quickly your retirement plan or IRA will need to be distributed to your beneficiaries. The rules are largely based on two factors: (1) the individuals you select as beneficiaries of your retirement plan, and (2) whether you pass away before or on or after your RBD.
Who is subject to the 10-year rule?
The SECURE Act still allows certain beneficiaries to “stretch” distributions, at least to some extent. These eligible designated beneficiaries (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. Generally, EDBs can take annual required distributions based on remaining life expectancy. However, once an EDB dies, or once a minor child EDB reaches age 21, any remaining funds must be distributed within 10 years.
Significantly, though, the SECURE Act requires that if your designated beneficiary is not an EDB, the entire account must be fully distributed within 10 years after your death.
What if your designated beneficiary is not an EDB?
If you die before your RBD, no distributions are required during the first nine years after your death, but the entire account must be distributed in the 10th year.
If you die on or after your RBD, annual distributions based on remaining life expectancy are required in the first nine years after the year of your death, then the remainder of the account must be distributed in the 10th year. Annual distributions after your death will be based on the greater of (a) what would have been your remaining life expectancy or (b) the beneficiary’s remaining life expectancy.
What if your beneficiary is a nonspouse EDB?
After your death, annual distributions will be required based on remaining life expectancy. If you die before your RBD, required annual distributions will be based on the EDB’s remaining life expectancy. If you die on or after your RBD, annual distributions after your death will be based on the greater of (a) what would have been your remaining life expectancy or (b) the beneficiary’s remaining life expectancy.
After your beneficiary dies or your beneficiary who is your minor child turns age 21, annual distributions based on remaining life expectancy must continue during the first nine years after the year of such an event. The entire account must be fully distributed in the 10th year.
What if your designated beneficiary is your spouse?
There are many special rules if your spouse is your designated beneficiary. The 10-year rule generally has no effect until after the death of your spouse, or possibly until after the death of your spouse’s designated beneficiary.
What life expectancy is used to determine RMDs after you die?
Annual required distributions based on life expectancy are generally calculated each year by dividing the account balance as of December 31 of the previous year by the applicable denominator for the current year (but the RMD will never exceed the entire account balance on the date of the distribution).
When your life expectancy is used, the applicable denominator is your life expectancy in the calendar year of your death, reduced by one for each subsequent year. When the nonspouse beneficiary’s life expectancy is used, the applicable denominator is that beneficiary’s life expectancy in the year following the calendar year of your death, reduced by one for each subsequent year. (Note that if the applicable denominator is reduced to zero in any year using this “subtract one” method, the entire account would need to be distributed.) And at the end of the appropriate 10-year period, any remaining balance must be distributed.
Relief for certain RMDs from inherited retirement accounts for 2024
The IRS has announced that it will not assert the penalty tax in certain circumstances where individuals affected by the RMD changes failed to take annual distributions in 2024 during one of the 10-year periods. (Similar relief was previously provided for 2021, 2022, and 2023.) For example, relief may be available if the IRA owner or employee died in 2020, 2021, 2022, or 2023 and on or after their RBD and the designated beneficiary who is not an EDB did not take annual distributions for 2021, 2022, 2023, or 2024 as required (during the 10-year period following the IRA owner’s or employee’s death). Relief might also be available if an EDB died in 2020, 2021, 2022, or 2023 and annual distributions were not taken in 2021, 2022, 2023, or 2024 as required (during the 10-year period following the EDB’s death).
The rules relating to required minimum distributions are complicated, and the consequences of making a mistake can be severe. Talk to a tax professional to understand how the rules, and the new regulations, apply to your individual situation.
Relief for Certain RMDs from Inherited Retirement Accounts for 2024
IRS issued in 2022, a proposed regulations regarding required minimum distributions (RMDs) to reflect changes made by the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019. The IRS has held off on releasing final regulations so that it can address additional changes to RMDs made by the SECURE 2.0 Act of 2022. In the meantime, the IRS has issued interim relief and guidance for certain RMDs from inherited retirement accounts for 2024. The IRS anticipates that final RMD regulations, when issued, will apply starting in 2025.
RMD basics
Certain RMDs must be taken from individual retirement accounts (IRAs) and employer retirement accounts, or a penalty will apply. IRA owners and employees with employer retirement plans must generally take RMDs during their lifetime.
RMDs are generally required to begin by April 1 of the year after the individual reaches RMD age. RMD age is 70½ (if born before July 1, 1949), 72 (if born July 1, 1949, through 1950), 73 (if born in 1951 to 1959), or 75 (if born in 1960 or later). An employee still working for the employer maintaining an employer retirement account may be able to wait until April 1 of the year after the employee retires (if that is later and the plan allows it). The applicable April 1 date is often referred to as the required beginning date (RBD).
Lifetime distributions are not required from Roth accounts and, as a result, Roth account owners are always treated as dying before their RBD. Prior to 2024, these two special rules for Roth accounts applied to Roth IRAs, but not to Roth employer retirement plans.
Beneficiaries must also take RMDs from an inherited retirement account (including Roth accounts) after the death of an IRA owner or employee.
Inherited IRAs and retirement plans
RMDs for IRAs and retirement plans inherited before 2020 could generally be spread over the life expectancy of a designated beneficiary. The SECURE Act changed the RMD rules by requiring that in most cases the entire account must be distributed 10 years after the death of the IRA owner or employee if there is a designated beneficiary (and if death occurred after 2019). However, an exception allows an eligible designated beneficiary to take distributions over their life expectancy and the 10-year rule would not apply until after the death of the eligible designated beneficiary in that case.
Eligible designated beneficiaries include a spouse or minor child of the IRA owner or employee, a disabled or chronically ill individual, and an individual no more than 10 years younger than the IRA owner or employee. The entire account would also need to be distributed 10 years after a minor child reaches the age of majority (i.e., distributed at age 31).
The proposed regulations issued in early 2022 surprised many when they suggested that annual distributions are also required during the first nine years of such 10-year periods in most cases. Comments on the proposed regulations sent to the IRS asked for some relief because RMDs had already been missed and a 25% penalty tax (50% prior to 2023) is assessed when an individual fails to take an RMD.
The IRS announced that it will not assert the penalty tax in certain circumstances where individuals affected by the RMD changes failed to take annual distributions in 2024 during one of the 10-year periods. (Similar relief was previously provided for 2021, 2022, and 2023.) For example, relief may be available if the IRA owner or employee died in 2020, 2021, 2022, or 2023 and on or after their RBD (see “RMD basics” above) and the designated beneficiary who is not an eligible designated beneficiary did not take annual distributions for 2021, 2022, 2023, or 2024 as required (during the 10-year period following the IRA owner’s or employee’s death). Relief might also be available if an eligible designated beneficiary died in 2020, 2021, 2022, or 2023 and annual distributions were not taken in 2021, 2022, 2023, or 2024 as required (during the 10-year period following the eligible designated beneficiary’s death).
The rules relating to RMDs are complicated, and the consequences of making a mistake can be severe. Talk to a tax professional to understand how the rules apply to your individual situation.
There’s Still Time to Fund an IRA for 2023
The tax filing deadline is fast approaching, which means time is running out to fund an IRA for 2023. If you had earned income last year, you may be able to contribute up to $6,500 for 2023 ($7,500 for those age 50 or older by December 31, 2023) up until your tax return due date, excluding extensions. For most people, that date is Monday, April 15, 2024.
You can contribute to a traditional IRA, a Roth IRA, or both. Total contributions cannot exceed the annual limit or 100% of your taxable compensation, whichever is less. You may also be able to contribute to an IRA for your spouse for 2023, even if your spouse had no earned income.
Traditional IRA contributions may be deductible
If you and your spouse were not covered by a work-based retirement plan in 2023, your traditional IRA contributions are fully tax deductible. If you were covered by a work-based plan, you can take a full deduction if you’re single and had a 2023 modified adjusted gross income (MAGI) of $73,000 or less, or married filing jointly with a 2023 MAGI of $116,000 or less. You may be able to take a partial deduction if your MAGI fell within the following limits.
| 2023 income ranges for a partial deduction for traditional IRA contributions: | ||
|---|---|---|
| Covered by a work-based plan and filing as: | Partial deduction if your MAGI is between: | No deduction if your MAGI is: |
| Single/Head of household | $73,000 and $83,000 | $83,000 or more |
| Married filing jointly | $116,000 and $136,000 | $136,000 or more |
| Married filing separately | $0 and $10,000 | $10,000 or more |
If you were not covered by a work-based plan but your spouse was, you can take a full deduction if your joint MAGI was $218,000 or less, a partial deduction if your MAGI fell between $218,000 and $228,000, and no deduction if your MAGI was $228,000 or more.
Consider Roth IRAs as an alternative
If you can’t make a deductible traditional IRA contribution, a Roth IRA may be a more appropriate alternative. Although Roth IRA contributions are not tax-deductible, qualified distributions are tax-free. You can make a full Roth IRA contribution for 2023 if you’re single and your MAGI was $138,000 or less, or married filing jointly with a 2023 MAGI of $218,000 or less. Partial contributions may be allowed if your MAGI fell within the following limits.
| 2023 income ranges for partial contributions to a Roth IRA: | ||
|---|---|---|
| Partial contributions are allowed if your MAGI is between: | You cannot contribute if your MAGI is: | |
| Single/Head of household | $138,000 and $153,000 | $153,000 or more |
| Married filing jointly | $218,000 and $228,000 | $228,000 or more |
| Married filing separately | $0 and $10,000 | $10,000 or more |
Tip: If you can’t make an annual contribution to a Roth IRA because of the income limits, there is a workaround. You can make a nondeductible contribution to a traditional IRA and then immediately convert that traditional IRA contribution to a Roth IRA. (This is sometimes called a backdoor Roth IRA.) Keep in mind, however, that you’ll need to aggregate all traditional IRAs and SEP/SIMPLE IRAs you own — other than IRAs you’ve inherited — when you calculate the taxable portion of your conversion.
A qualified distribution from a Roth IRA is one made after the account is held for at least five years and the account owner reaches age 59½, becomes disabled, or dies. If you make an initial contribution — no matter how small — to a Roth IRA for 2023 by your tax return due date, and it is your first Roth IRA contribution, your five-year holding period starts on January 1, 2023.
You have until your tax return due date, excluding extensions, to contribute up to $6,500 for 2023 ($7,500 if you were age 50 or older on December 31, 2023) to all IRAs combined. For most taxpayers, the contribution deadline for 2023 is April 15, 2024.
Roth Conversions are getting a lot of attention
Some consider the drop in the markets maybe a good time for some to consider converting traditional IRAs to Roth IRAs. The withdrawal of the assets from the traditional IRA would be taxed currently. The resulting tax would be lower as the value of the investment would be lower. The future growth of the assets would not be taxable in the Roth or to the beneficiaries of the Roth. There are many assumptions and conditions to achieve the desired benefits.
Tax rate assumptions
One assumption is that you will be in a lower tax bracket when you retire. A related assumption is that the tax laws will not change when the funds are distributed from the Roth. One approach would be to calculate your tax based on various assumptions. Depending on your current tax bracket and assumed future tax brackets to see how much to convert now.
Future values
There is a risk that the value of the investment will not grow or will drop in value.
Two five-year tests
To qualify for tax-free and penalty-free withdrawal of earnings, including earnings on converted amounts, a Roth account must meet a five-year holding period beginning January 1 of the year your first Roth account was opened, and the withdrawal must take place after age 59½ or meet an IRS exception. If you have had a Roth IRA for some time, this may not be an issue, but it could come into play if you open your first Roth IRA for the conversion.
Assets converted to a Roth IRA can be withdrawn free of ordinary income tax at any time, because you paid taxes at the time of the conversion. However, a 10% penalty may apply if you withdraw the assets before the end of a different five-year period, which begins January 1 of the year of each conversion, unless you are age 59½ or another exception applies.
Roth account are not subject to Required Minimum Distributions (RMD)
Roth IRAs are not required to minimum distributions. Distributions are tax-free to the original owner of the Roth IRA and spouse beneficiaries who treat a Roth IRA as their own. Other beneficiaries inheriting a Roth IRA are subject to the RMD rules. The longer your investments can pursue growth, the more advantageous it may be for you and your beneficiaries to have tax-free income.
There are many considerations and assumption in determining if a Roth Conversion is appropriate for anyone. The above is not intended as a complete discussion of the subject. A trusted advisor should be consulted to see if a conversion should be considered .
All investing involves risk, including the possible loss of principal, and there is no guarantee that any investment strategy will be successful.
Required Distributions from Inherited Retirement Accounts Change after 2019
Changes were made to the Required Minimum Distributions (RMD) for inherited Retirement Accounts by The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019. The ability of beneficiaries to “stretch-out” the distribution of the account balance of an inherited defined contribution plan or an IRA were changed. After 2019 beneficiaries must distribute the full amount in the account within 10 years of the original owner’s death, with some exceptions. Where an exception applies, the entire account must generally be emptied within 10 years of the beneficiary’s death, or within 10 years after a minor child beneficiary reaches age 21.
IRS issued proposed regulations (generally applicable starting in 2022) that interpret the revised required minimum distribution (RMD) rules in February 2022. The new rules are complex and create uncertainty. Hopefully, the IRS will simplify and answer the questions. Account owners and their beneficiaries would benefit by familiarize themselves with these new interpretations and how they might be affected by them.
RMD BasicsOwners of traditional IRAs and participants of retirement plan like a 401(k) must start taking RMDs in the year they reach age 72 (age 70½ if you were born before July 1, 1949). An owner of the account may be able to wait until the year after retiring to start RMDs from that account at age 72 or older and still working for the employer that maintains the retirement plan. No RMDs are required from a Roth IRA during lifetime (beneficiaries are subject to inherited retirement account rules). Generally, a 50% penalty applies to the extent that RMDs are not timely distributed.
Changes were made to the Required Minimum Distributions (RMD) for inherited Retirement Accounts by The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019. The ability of beneficiaries to “stretch-out” the distribution of the account balance of an inherited defined contribution plan or an IRA were changed. After 2019 beneficiaries must distribute the full amount in the account within 10 years of the original owner’s death, with some exceptions. Where an exception applies, the entire account must generally be emptied within 10 years of the beneficiary’s death, or within 10 years after a minor child beneficiary reaches age 21.
IRS issued proposed regulations (generally applicable starting in 2022) that interpret the revised required minimum distribution (RMD) rules in February 2022. The new rules are complex and create uncertainty. Hopefully, the IRS will simplify and answer the questions. Account owners and their beneficiaries would benefit by familiarize themselves with these new interpretations and how they might be affected by them.
RMD Basics
Owners of traditional IRAs and participants of retirement plan like a 401(k) must start taking RMDs in the year they reach age 72 (age 70½ if you were born before July 1, 1949). An owner of the account may be able to wait until the year after retiring to start RMDs from that account at age 72 or older and still working for the employer that maintains the retirement plan. No RMDs are required from a Roth IRA during lifetime (beneficiaries are subject to inherited retirement account rules). Generally, a 50% penalty applies to the extent that RMDs are not timely distributed.
The required beginning date (RBD) for the first year must be taken by April 1 of the next year. After the first distribution, annual distributions must be taken by the end of each year. Note, if the first distribution is delayed until April 1 two distributions will be required for that year, one by April 1 and the other by December 31.
The RMD rules govern how quickly retirement plans and/or IRAs must be distributed by the beneficiaries of the accounts. The rules are largely based on two factors: (1) the individuals named as beneficiaries of the retirement plan, and (2) whether the owner dies before or on or after your RBD. Because no lifetime RMDs are required from a Roth IRA, Roth IRA owners are always treated as dying before their RBD.
Who Is Subject to the 10-Year Rule?
Eligible designated beneficiaries (EDBs) are permitted to stretch out distributions to a limited extent. EDB’s include your surviving spouse, your minor children, any individuals not more than 10 years younger than you, and certain disabled or chronically ill individuals. Generally, EDBs can take annual required distributions based on remaining life expectancy. However, once an EDB dies, or once a minor child EDB reaches age 21, any remaining funds must be distributed within 10 years.
Note that the SECURE Act requires that if a designated beneficiary is not an EDB, the entire account must be fully distributed within 10 years after your death.
What If the Designated Beneficiary Is Not an EDB?
If you die before your required beginning date, no distributions are required during the first nine years after your death, but the entire account must be distributed in the tenth year.
If you die on or after your required beginning date, annual distributions based on the designated beneficiary’s remaining life expectancy are required in the first nine years after the year of your death, then the remainder of the account must be distributed in the tenth year.
What If the Beneficiary Is a Nonspouse EDB?
Annual distributions will be required based on your remaining life expectancy. If death occurs before the required beginning date, required annual distributions will be based on the EDB’s remaining life expectancy. If the owner of the account dies on or after their required beginning date, annual distributions after the owner’s death will be based on the greater of (a) what would have been the owners remaining life expectancy or (b) the beneficiary’s remaining life expectancy. Also, if distributions are calculated each year based on what would have been the remaining life expectancy, the entire account must be distributed by the end of the calendar year in which the beneficiary’s remaining life expectancy would have been reduced to one or less (if the beneficiary’s remaining life expectancy had been used).
After the death of the beneficiary or if the beneficiary is a minor child turns age 21, annual distributions based on remaining life expectancy must continue during the first nine years after the year of such an event. The entire account must be fully distributed in the tenth year.
What If a Designated Beneficiary A Spouse?
There are many special rules if a spouse is a designated beneficiary. The 10-year rule generally has no effect until after the death of the surviving spouse, or possibly until after the death of the spouse’s designated beneficiary.
What Life Expectancy Is Used to Determine RMDs After Death?
Annual required distributions based on life expectancy are generally calculated each year by dividing the account balance as of December 31 of the previous year by the applicable denominator for the current year (but the RMD will never exceed the entire account balance on the date of the distribution).
When life expectancy is used, the applicable denominator is the life expectancy in the calendar year of death, reduced by one for each subsequent year. When the nonspouse beneficiary’s life expectancy is used, the applicable denominator is that beneficiary’s life expectancy in the year following the calendar year of your death, reduced by one for each subsequent year. (Note that if the applicable denominator is reduced to zero in any year using this “subtract one” method, the entire account would need to be distributed.) And at the end of the appropriate 10-year period, any remaining balance must be distributed.
The rules relating to required minimum distributions are complicated, and the consequences of making a mistake can be severe. Talk to a tax professional to understand how the rules, and the new proposed regulations, apply to your individual situation.
Social Security Offices will not reopen for in-person meetings as originally planned January 3, 2022.
December 22, 2021, SSA announced they would not re-open as many expected.
The public is encouraged to use their online services. https://www.ssa.gov/onlineservices/
Their online services can be accessed by activating your Social Security account. Create an account if you do not have an account.
https://secure.ssa.gov/RIL/SiView.action
https://www.ssa.gov/myaccount/
The phone numbers for the local offices can be found using their “Field Office Locator”
https://secure.ssa.gov/ICON/main.jsp
Their COVID-19 web page provides mor information to learn more.
https://www.ssa.gov/coronavirus/
The Retirement Benefit portal has been updated.
https://www.ssa.gov/benefits/retirement/
2021 RMDs
Required Minimum Distributions (RMD) for 2021 must be paid by December 31, 2021. The requirement for 2020 was waived. Check with the custodian(s) where your IRA(s) are held if you have not yet received your entire RMDs for 2021. Some custodians have indicated delays in completing time sensitive transactions by December 31, 2021.
Annual RMDs have been required to begin at age 70.5 before a recent change. This requirement still applies to anyone born by June 30, 1949. Anyone born on or after July 1, 1949, are now required to start at age 72.
An exception to the beginning date applies to employees of retirement plans sponsored by their employers unless they own 5% or more of their employer. The required beginning date is postponed until they retire.
The first RMD may be postponed till April 1 of the following year. Delaying the distribution will result in 2 distributions in the following year. Among the factors to consider is the tax impact of delaying the RMD to April 1 of the next year.
RMDs apply to defined contributions plans and Induvial Retirement Plans (IRA). The distribution rules appl to IRA, SEP IRA, SIMPLE IRA, and Qualified Plans, such as Simplified Employee Plans, 401(k) Plans, are examples of Qualified Plans.
A 50% penalty applies if the RMDs are not paid by December 31 of the year required.
The above rules do not apply beneficiaries of inherited accounts. The rules for inherited is beyond the scope of this discussion.
RMDs are the minimum distribution. Larger distributions are permitted. This may apply when the applicable tax rate will be different in each year. Another factor is if you have a large or unexpected expenditures.
Your account balance is usually calculated as of December 31 of the year preceding the calendar year for which the distribution is required to be made. That balance is generally divided by the life expectancy factor determined by the IRS. You use your attained age in the distribution year by factor in the applicable IRS Uniform Lifetime Tables. The table assumes that you have designated a beneficiary who is exactly 10 years younger than you are. Every IRA owner’s and plan participant’s calculation is based on the same assumption.
Different calculations are used if the spouse is more than 10 years younger than you. the calculation of your RMDs may be based on the longer joint and survivor life expectancy of you and your spouse.
A new table will be used starting in 20222. The tables will reduce the annual RMD. The foregoing is provided for information purposes only. It is not intended or designed to provide legal, accounting, tax, investment, or other professional advice. Such advice requires consideration of individual circumstances. Before any action is taken based upon this information, it is essential that competent, individual, professional advice be obtained. JAS Financial Services, LLC is not responsible for any modifications made to this material, or for the accuracy of information provided by other source
Required Minimum Distributions (RMD) for 2021 must be paid by December 31, 2021. The requirement for 2020 was waived. Check with the custodian(s) where your IRA(s) are held if you have not yet received your entire RMDs for 2021. Some custodians have indicated delays in completing time sensitive transactions by December 31, 2021.
Annual RMDs have been required to begin at age 70.5 before a recent change. This requirement still applies to anyone born by June 30, 1949. Anyone born on or after July 1, 1949, are now required to start at age 72.
An exception to the beginning date applies to employees of retirement plans sponsored by their employers unless they own 5% or more of their employer. The required beginning date is postponed until they retire.
The first RMD may be postponed till April 1 of the following year. Delaying the distribution will result in 2 distributions in the following year. Among the factors to consider is the tax impact of delaying the RMD to April 1 of the next year.
RMDs apply to defined contributions plans and Induvial Retirement Plans (IRA). The distribution rules appl to IRA, SEP IRA, SIMPLE IRA, and Qualified Plans, such as Simplified Employee Plans, 401(k) Plans, are examples of Qualified Plans.
A 50% penalty applies if the RMDs are not paid by December 31 of the year required.
The above rules do not apply beneficiaries of inherited accounts. The rules for inherited is beyond the scope of this discussion.
RMDs are the minimum distribution. Larger distributions are permitted. This may apply when the applicable tax rate will be different in each year. Another factor is if you have a large or unexpected expenditures.
Your account balance is usually calculated as of December 31 of the year preceding the calendar year for which the distribution is required to be made. That balance is generally divided by the life expectancy factor determined by the IRS. You use your attained age in the distribution year by factor in the applicable IRS Uniform Lifetime Tables. The table assumes that you have designated a beneficiary who is exactly 10 years younger than you are. Every IRA owner’s and plan participant’s calculation is based on the same assumption.
Different calculations are used if the spouse is more than 10 years younger than you. the calculation of your RMDs may be based on the longer joint and survivor life expectancy of you and your spouse.
A new table will be used starting in 20222. The tables will reduce the annual RMD.
The foregoing is provided for information purposes only. It is not intended or designed to provide legal, accounting, tax, investment, or other professional advice. Such advice requires consideration of individual circumstances. Before any action is taken based upon this information, it is essential that competent, individual, professional advice be obtained. JAS Financial Services, LLC is not responsible for any modifications made to this material, or for the accuracy of information provided by other source
Required Minimum Distributions (RMD) for 2021
Following are some of the developments to be consider before December 31,2021.
What Are RMDs?
Required annual distributions are required if you have a traditional IRA and most employer-sponsored retirement plans. RMDs are not required from an employer plan if you are still working at the company sponsoring the plan and you do not own more than 5% of the company. You can always take more than the required amount if you choose.
The portion of an RMD representing earnings and tax-deductible contributions is taxed as ordinary income, unless the RMD is a qualified distribution from a Roth account. Failing to take the full amount of an RMD could result in a penalty tax of 50% of the difference.
Everyone who reached 70½ (required beginning date) before January 1, 2020, was required to start making annual RMDs. Generally, RMDs must be taken by December 31 each year. You can delay your first RMD until April 1 following the year in which you reach RMD age; however, you will then need to take two RMDs in one year — the first by April 1 and the second by December 31. (If you reached age 72 in the first half of 2021, different rules apply; see below.) You should weigh the decision to delay your first RMD carefully. Taking two distributions in one year might bump you into a higher income tax bracket for that year.
New RMD Age and a 2020 Waiver Add Complexity
The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 raised the minimum RMD age to 72 from 70½ beginning in 2020. That means if you reached age 70½ before 2020, you are currently required to take minimum distributions.
However, there was a pandemic-related rule change in 2020 that might have affected some retirement savers who reached age 70½ in 2019. To help individuals manage financial challenges brought on by the pandemic, RMDs were waived in 2020, including any postponed from 2019. In other words, some taxpayers could have benefited from waiving both their 2019 and 2020 RMDs.
Anyone who took advantage of the 2020 waiver should note that RMDs have resumed in 2021 and need to be taken by December 31. The option to delay to April 1, 2022, applies only to first RMDs for those who have reached or will reach age 72 on or after July 1, 2021.
New Life Expectancy Tables
The IRS publishes tables in Publication 590-B that are used to help calculate RMDs. To determine the amount of a required distribution, you would divide your account balance as of December 31 of the previous year by the appropriate age-related factor in one of three available tables.
Recognizing that life expediencies have increased, the IRS has issued new tables designed to help investors stretch their retirement savings over a longer period. These new tables will take effect for RMDs beginning in 2022. Investors may be pleased to learn that calculations will typically result in lower annual RMD amounts and potentially lower income tax obligations as a result. The old tables still apply to 2021 distributions, even if they’re postponed until 2022.
The New Fixed Distribution
The New Fixed Distribution Rule
The beneficiaries of an IRA, other than a spouses and certain other specified persons, are required to take the balance of the account within 10 years. The distributions do not have to be consist in each year if the entire balance is paid out within 10-years
Timing
Allow for delays in in processing and delivery of the distributions before December 31, 2021.
For more information on RMDs, consider speaking with your financial and tax professionals.
Is the Back-Door Roth IRA Going Away for Good?
Among the many provisions in the multi-trillion-dollar legislative package being debated in Congress is a provision that would eliminate a strategy that allows high-income investors to pursue tax-free retirement income: the so-called back-door Roth IRA. The next few months may present the last chance to take advantage of this opportunity.
Roth IRA Background
Since its introduction in 1997, the Roth IRA has become an attractive investment vehicle due to the potential to build a sizable, tax-free nest egg. Although contributions to a Roth IRA are not tax deductible, any earnings in the account grow tax-free if future distributions are qualified. A qualified distribution is one made after the Roth account has been held for five years and after the account holder reaches age 59½, becomes disabled, dies, or uses the funds for the purchase of a first home ($10,000 lifetime limit).
Unlike other retirement savings accounts, original owners of Roth IRAs are not subject to required minimum distributions at age 72 — another potentially tax-beneficial benefit that makes Roth IRAs appealing in estate planning strategies. (Beneficiaries are subject to distribution rules.)
However, as initially passed, the 1997 legislation rendered it impossible for high-income taxpayers to enjoy Roth IRAs. Individuals and married taxpayers whose income exceeded certain thresholds could neither contribute to a Roth IRA nor convert traditional IRA assets to a Roth IRA.
A Loophole Emerges
Nearly 10 years after the Roth’s introduction, the Tax Increase Prevention and Reconciliation Act of 2005 ushered in a change that relaxed the conversion rules beginning in 2010; that is, as of that year, the income limits for a Roth conversion were eliminated, which meant that anyone could convert traditional IRA assets to a Roth IRA. (Of course, a conversion results in a tax obligation on deductible contributions and earnings that have previously accrued in the traditional IRA.)
One perhaps unintended consequence of this change was the emergence of a new strategy that has been utilized ever since: High-income individuals could make full, annual, nondeductible contributions to a traditional IRA and convert those contribution dollars to a Roth. If the account holders had no other IRAs (see note below) and the conversion was executed quickly enough so that no earnings were able to accrue, the transaction could potentially be a tax-free way for otherwise ineligible taxpayers to fund a Roth IRA. This move became known as the back-door Roth IRA.
(Note: When calculating a tax obligation on a Roth conversion, investors must aggregate all their IRAs, including SEP and SIMPLE IRAs, before determining the amount. For example, say an investor has $100,000 in several different traditional IRAs, 80% of which is attributed to deductible contributions and earnings. If that investor chose to convert any traditional IRA assets — even recent after-tax contributions — to a Roth IRA, 80% of the converted funds would be taxable. This is known as the “pro-rata rule.”)
Current Roth IRA Income Limits
For 2021, you can generally contribute up to $6,000 to an IRA (traditional, Roth, or a combination of both); $7,000 if you’ll be age 50 or older by December 31. However, your ability to make contributions to a Roth IRA is limited or eliminated if your modified adjusted gross income, or MAGI, falls within or exceeds the parameters shown below.
| If your federal filing status is: | Your 2021 Roth IRA contribution is reduced if your MAGI is: | You can’t contribute to a Roth IRA for 2021 if your MAGI is: |
| Single or head of household | More than $125,000 but less than $140,000 | $140,000 or more |
| Married filing jointly or qualifying widow(er) | More than $198,000 but less than $208,000 | $208,000 or more |
| Married filing separately | Less than $10,000 | $10,000 or more |
Note that your contributions generally can’t exceed your earned income for the year (special rules apply to spousal Roth IRAs).
Now or Never … Maybe
While no one knows for sure what may come of the legislative debates, the current proposal would prohibit the conversion of nondeductible contributions from a traditional IRA after December 31, 2021. If you expect your MAGI to exceed this year’s thresholds and you’d like to fund a Roth IRA for 2021, the next few months may be your last chance to use the back-door strategy. Contact your financial and tax professionals for more information.
There is no assurance that working with a financial professional will improve investment results.
You can make 2021 IRA contributions up until April 15, 2022, but if the legislation is enacted, a Roth conversion involving nondeductible contributions would have to be conducted by December 31, 2021.
Keep in mind that a separate five-year rule applies to the principal amount of each Roth IRA conversion you make unless an exception applies.
Should You Be Concerned About Inflation?
If you pay attention to financial news, you are probably seeing a lot of discussion about inflation, which has reared its head in the U.S. economy after being mostly dormant for the last decade. In May 2021, the Consumer Price Index for All Urban Consumers (CPI-U), often called headline inflation, rose at an annual rate of 5.0%, the highest 12-month increase since August 2008.1
The CPI-U measures the price of a fixed market basket of goods and services purchased by residents of urban and metropolitan areas — about 93% of the U.S. population. You have likely seen price increases in some of the goods and services you purchase, and if so it’s natural to be concerned.
The larger question is whether these price increases are temporary, caused by factors such as supply-chain issues and labor shortages that will be resolved as the economy continues to emerge from the pandemic, or whether they indicate a fundamental imbalance that could cause widespread long-term inflation and hold back economic growth.
Most economists — including Federal Reserve Chair Jerome Powell and Treasury Secretary Janet Yellen — believe the current spike is primarily due to transitory factors that will fade in the coming months. One example of this, cited by Powell in a recent press conference, is the price of lumber.2–3
Supply and Demand
Early in the pandemic, many lumber mills shut down or cut back on production because they expected a major slowdown in building. In fact, demand for housing and home renovation increased during the pandemic, as many people who worked from home wanted more space, a different location, or improvements to their current homes. Low supply and high demand sent lumber prices soaring.4
Sawmills geared up as quickly as they could and were reaching full capacity just as demand began to ebb, with builders cutting back due to high prices and homeowners using their discretionary income to buy other goods and services. Suddenly the supply exceeded demand, and prices began to drop. Wholesale lumber prices are still higher than before the pandemic, and it takes time for price drops to filter down to the retail level, but it’s clear that the extreme inflation was transitory and has been reversed. The lumber story also suggests that consumers and businesses will cut back on spending for a product that becomes too expensive rather than spend at any price and feed an inflationary spiral.5
Chips and Cars
Another example of pandemic-driven imbalance between supply and demand is used car and truck prices, which have skyrocketed almost 30% over the last 12 months and represent a substantial portion of the overall increase in CPI. Used vehicles are hard to find in large part because fewer new cars are being built — and fewer new cars are being built because there is a shortage of computer chips. A single new car can require more than 1,000 chips, and when auto manufacturers were forced to close their factories early in the pandemic and new vehicle sales plummeted due to lack of demand, chip manufacturers shifted from producing chips for cars to producing chips for high-demand consumer electronics such as webcams, phones, and laptops.6–8
As the economy reopened and the demand for cars increased, chip producers were unable to shift and increase production quickly enough to meet the needs of auto manufacturers. The chip shortage is expected to reduce global auto production by 3.9 million vehicles in 2021, a drop of 4.6%. Unlike lumber, the chip shortage may take some time to resolve, because chip manufacturing is a long, multi-step process and most chips are manufactured outside the United States. The federal government has stepped in to encourage U.S. manufacturers to build new facilities and increase production.9
Fundamental Forces
Imbalances between supply and demand are to be expected as the economy reopens, and most such imbalances should work themselves out in the marketplace. But other forces could fuel more extensive inflation. Massive federal stimulus packages have provided consumers with more money to spend, while ongoing stimulus from the Federal Reserve has increased the money supply and made it easier to borrow.
Although unemployment is still relatively high at 5.9%, millions of jobs remain open as workers are hesitant to return to positions they consider unsafe in light of the pandemic, are unable to work due to lack of child care, and/or are rethinking their careers in a post-pandemic world.10–11This may change in September as extended unemployment benefits expire and children return to school, but the current imbalance is forcing many businesses to raise wages, especially in lower-paying jobs.12
The increases so far are primarily “catching up” after many years of low wages and should be absorbed by businesses or passed on to consumers with moderate price increases.13 However, if wages and prices increase too quickly and consumers earning higher wages are willing to spend regardless of rising prices — because they expect prices to rise even higher — the wage-price inflation spiral could be difficult to control.
Reading the Economy
When considering the current situation, it’s helpful to look at other measures of inflation.
Base effect. On a purely mathematical level, high 12-month CPI increases in March, April, and May 2021 reflect the fact that the CPI is being compared with those months in 2020, when prices decreased as the economy closed in response to the pandemic. This comparison to unusually low numbers is called the base effect. To avoid this effect, it’s helpful to look at annualized inflation over a two-year period, comparing prices now with prices before the pandemic. By that measure, current inflation is about 2.5%, a little higher than the average over the last decade but not nearly as concerning as a 5.0% level.14
Core inflation. Prices of some items are more volatile than others, and food and energy are especially volatile categories that can change quickly even in a low-inflation environment. For this reason, economists tend to look more carefully at core inflation, which strips out food and energy prices and generally runs lower than CPI-U. Core CPI rose at an annual rate of 3.8% in May 2021, which sounds better than 5.0% until you consider that it is the highest core inflation since June 1992. The good news is that the 0.7% monthly increase from April to May was lower than the 0.9% rise from March to April, suggesting that core inflation may be slowing down. (The CPI-U increase also slowed in May, rising 0.6% for the month after a 0.8% increase in April.)15
Sticky prices. Another helpful measure is the sticky-price CPI, which sorts the components of the CPI into categories that are relatively slow to change (sticky) and those that change more rapidly (flexible). The sticky price CPI increased just 2.7% over the 12-month period ending in May 2021. By contrast, the flexible component of the CPI increased 12.4% over the year.16 This suggests that a variety of factors — such as problems with supply chains, labor, and extreme weather — may be moving prices on flexible items, but that underlying economic forces are moving more stable prices at a relatively moderate rate.
The Fed’s Arsenal
The Federal Open Market Committee (FOMC), an arm of the Federal Reserve, is charged with setting economic policy to meet its dual mandate of fostering maximum employment while promoting price stability. The Fed’s primary economic tools are the benchmark federal funds rate, which affects many other interest rates, and its bond-buying program, which injects liquidity into the economy. Put simply, the Fed lowers the funds rate and buys bonds to stimulate the economy and increase employment, and raises the rate and stops buying bonds or sells bonds to put the brakes on inflation.
The federal funds rate has been at its rock-bottom range of 0.0% to 0.25% since March 2020, when the Fed dropped it quickly in the face of the pandemic, and the Federal Reserve is buying $120 billion in government bonds every month, much less than it did early in the pandemic but still a substantial and steady injection of money into the economy.17 (Unlike an individual or a regular bank that must spend money to purchase bonds, the central bank buys bonds by creating an electronic deposit in one of its member banks, thus creating “new money” that can be used to lend and circulate into the economy.)
Some inflation is necessary for economic growth — without it, an economy is stagnant — and in 2012, the FOMC set a 2% target for healthy inflation, based on a measure called the Personal Consumption Expenditures (PCE) Price Index. The PCE price index uses much of the same data as the CPI, but it captures a broader range of expenditures and reflects changes in consumer spending.
More specifically, the FOMC focuses on core PCE (excluding food and energy), which remained below the 2% target for most of the last decade. In August 2020, the FOMC changed its policy to target an average PCE inflation rate of 2% and indicated it would allow inflation to run higher for some time to balance the time it ran below the target. This is the current situation. Core PCE increased at a 12-month rate of 3.4% in May 2021, but so far the Fed has shown little inclination to take action in the short term.18 The FOMC projects PCE inflation to drop to 3.1% by the end of the year and to 2.1% by the end of 2022.19
At its June meeting, the FOMC did indicate an important shift by projecting the federal funds rate would increase in 2023 to a range of 0.5% to 0.75%, effectively two quarter-point steps. (In March, the projection had been to hold the rate steady at least through 2023.) Fed Chair Powell also indicated that the FOMC has begun “talking about talking about” reducing the monthly bond purchases.20 Neither of these signals suggests any immediate action or serious concern about inflation. However, the fact that the funds rate remains near zero and that the Fed continues to buy bonds gives the central bank powerful “weapons” to employ if it believes inflation is increasing too quickly.
The next few months may indicate whether inflation is slowing down or changes in monetary policy are necessary. Unfortunately, prices do not always come down once they rise, but it may be helpful to keep in mind that prices of many goods and services did decline during the pandemic, and the higher prices you are seeing today might not be far out of line compared with prices before the economic slowdown. As long as inflation begins trending downward, it seems likely that the current numbers reflect growing pains of the recovery rather than a long-term threat to economic growth.
U.S. Treasury securities are backed by the full faith and credit of the U.S. government as to the timely payment of principal and interest. The principal value of Treasury securities fluctuates with market conditions. If not held to maturity, bonds could be worth more or less than the original amount paid. Projections are based on current conditions, are subject to change, and may not come to pass.
1, 6, 10, 14) U.S. Bureau of Labor Statistics, 2021
2, 17, 19–20) Federal Reserve, 2021
3) Bloomberg, June 5, 2021
4–5) The New York Times, June 21, 2021
7) CBS News, June 22, 2021
8–9) Time, June 28, 2021
11) CNBC, June 8, 2021
12–13) CNBC, May 22, 2021
15) The Wall Street Journal, June 22, 2021
16) Federal Reserve Bank of Atlanta, 2021
18) U.S. Bureau of Economic Analysis, 2021
