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Required Minimum Distribution Confusion in 2022

Ed Slott shares what changes have arrived.

Christine Benz: Hi, I'm Christine Benz from Morningstar. Required minimum distributions have gotten a little bit trickier in 2022. Joining me to discuss what you need to know is tax and retirement planning expert, Ed Slott.

Ed, thank you so much for being here.

Ed Slott: Thanks, Christine.

Benz: Great to have you here. I want to talk about IRA RMDs, required minimum distributions, from retirement accounts. Some things are changing regarding the tables that people use to calculate their RMDs. What should people know about this?

Slott: Well, they should know that these rules generally apply to older people, once you're 72, and between Congress and IRS and relief they're making their lives miserable with all this complexity. You have the combination--it started with the Secure Act raising the RMD age from 70.5 to 72. Then the Cares Act came in and waived RMDs for 2020, and then IRS came in with new tables for 2022 that applied to almost everybody in 2022, but not everybody. So, it's getting a little confusing on which tables to use and how much to take and which rules apply to you. It shouldn't be that complicated.

Benz: No, it's super complicated. I'm wondering if you can discuss the substance of these new tables: What's changing and what are the implications, and also, should everyone be using the new tables?

Slott: If you turn 70.5 after 2020, you use age 72. So, a better way to say it--if you turn 72 years old in the second half of 2021, you're using the new tables, and your first distribution would probably be for 2021. But the regular rules say when you're taking your first distribution, you have until April 1 of the next year to take that distribution. So, if that's you, and this is your first distribution under the new rules, you may have not taken your '21 distribution. But as many people know already, if you do wait till the next year, till April 1 if you defer it, then you have to take two distributions in that year--your first one for the last year, '21, and the second one by the end of the year for '22. If that's your situation--and a lot of people watching maybe in that situation--you actually use two different tables. Even though everything out there says if you're taking RMDs in '22, you use the new 2022 tables. Not true in this case. You're taking your 2021 distribution, RMD, in '22, but because it's your 2021 distribution, you still use the old table for that one. But then, for your second one, which is due by the end of the year, you switch to the new table. If you're just starting in 2022 and you didn't take distributions before, the table is for 2022 RMDs--then you only use the new table.

Benz: Good to know. I wanted to ask about people who are IRA beneficiaries. There have been some changes for them as a result of the Secure Act. What do they need to know about RMDs and these tables that perhaps beneficiaries needed to use in the past?

Slott: Most beneficiaries, nonspouse beneficiaries, will no longer get the so-called stretch IRA. The only categories that get them are surviving spouses and a couple of other categories. So, most nonspouse beneficiaries like grandchildren or older children will now use a 10-year rule. But now, it's been made more complicated. Now, if you're on the 10-year rule, you shouldn't need any tables. By the end of the 10th year, everything has to come out. So, you don't even need to know that. But now, thanks to the new IRS rules that just came out in late February, that may not be the case. You may have a situation where you have to use the table for the first nine years and then in the 10th year everything comes out. If you inherited before the person you inherited from--say, Dad--died before his required beginning date, say before age 72, your 10-year rule, you don't need any tables. There's no RMDs required for years one through nine, unless you want to take them. That's voluntary. Everything has to come out at the end of the 10th year. But if Dad died while he had already begun RMD, say, at age 75 or 80, you're still on the 10-year rule. But according to these brand-new rules, IRS is now taking the position, in regulations they just released, that you will have to take RMDs based on your life expectancy for years one through nine. So, there you use the new table. And then, in year 10, whatever the balance is at the end of the 10th year, everything has to come out. So, the rules are a little bit more complicated for beneficiaries who don't get the stretch, which is most of your nonspouse beneficiaries, if they inherit from somebody who died after their required beginning date, after age 72. So, it's getting a little more complicated, a lot more complicated.

Benz: Definitely. This seems like a spot, if you are someone who has inherited an IRA, especially within the past couple of years, get some advice about how to proceed before just taking those distributions, would you say that?

Slott: Oh, yeah, but wait, there's more, like I always say on public television. If you're a beneficiary who inherited before the Secure Act, let's say you inherited before 2020, and you were doing the stretch IRA, maybe you have 30 years, you get to continue that schedule. But now, you get to use, which is a benefit, the new table, which slightly lowers your RMDs, but you have to go and reset your schedule to the new table.

Benz: Oh, boy. So, just really quickly, can you discuss what this stretch IRA is so that people are clear on that?

Slott: Yeah, what it was.

Benz: Yes.

Slott: ... what it was for the beneficiaries who were able to take advantage of it. If you had a named beneficiary, say, your child or your grandchild, they could go out once they inherit, defer it, and only take minimum distributions but over their life expectancy, 10, 20, 30, 50, 70 years if you had a young beneficiary. Congress decided in the Secure Act that retirement accounts should be just for you, not as a wealth transfer or estate planning vehicle so your kids can defer it out for 50, 60, 70 years. So, starting for people who inherited in 2020 or later, there's no more stretch IRA except for those special categories called eligible designated beneficiaries like your spouse, but nonspouses will be stuck with that 10-year rule. Everything has to come out by the end of the 10th year after death, even with a Roth IRA. So, that's a big change. And if you don't have a Roth IRA, the kids or the inheritors will have to take it all out in 10 years, bunching a lot of that income into that shorter period.

Benz: Ed, complicated stuff. Thank you so much for being here to unpack it for us.

Slott: Our tax dollars at work. Thanks.

Benz: Thanks for watching. I'm Christine Benz for Morningstar.