Required Minimum Distributions

It’s no secret that the U.S. population is getting older. Today, there are more than 54 million adults aged 65 and older, but by 2030, that number is expected to rise to 74 million. While this trend will create a number of social issues, one thing we tax preparers know is; helping our clients deal with retirement accounts is going to become an increasingly large part of our practices.

The rules for taking out retirement distributions are complex; like the rest of the tax code, the rules are subject to change. And we’ve never before seen as complex a set of changes as we’re seeing lately.

The SECURE (a nice acronym for “Setting Every Community Up for Retirement Enhancement”) Act was enacted into law on December 20, 2019. It completely changed the rules about how taxpayers could save money for retirement and how retirement money could be withdrawn. It was the first major legislative change to retirement tax laws in over a decade and it was, in short, a game-changer. 

SECURE changed the RBD (Required Beginning Date) for taking Required Minimum Distributions (RMDs) from 70 ½ years old to 72 years old, but only for those taxpayers who hadn’t reached 72 years old as of December 31, 2019. In other words, if a taxpayer had already started taking out RMDs under the old rules, then they had to keep on taking those out. Of course, this doesn’t mean that clients can’t take distributions, only that they’re not required to do so. 

SECURE also gave Qualified Charitable Distributions (QCDs) a bit of a boost by indexing the $100,000 QCD ceiling to inflation. 

Another big change that impacted how our clients take out their retirement savings was changed life expectancy tables! The life expectancy tables that were used to calculate RMDs literally hadn’t been updated for 20 years. It turns out that we’re all living a lot longer than before, even with COVID, so the new life expectancy tables are calculating smaller RMDs. The hope is that by taking out smaller RMDs, taxpayers are less likely to run out of money during their retirement years. The new tables can be seen in Pub 590-B, Distributions from Individual Retirement Accounts. 

There are still three different tables: 

• • • Table I, the Single Life Expectancy Table, is used only for beneficiaries, not for the original plan owners. 
    • Table II, the Joint Life and Last Survivor Expectancy Table is used by heirs whose spouses are more than ten years younger than the original plan owner and are the sole beneficiary of that retirement account. 
    • Table III is the Uniform Lifetime Table, which is used by account owners who aren’t married; married account owners whose spouses aren’t more than ten years younger than the account owner; and married account owners whose spouses aren’t the sole beneficiaries of the accounts. 

Understanding the different uses of these tables is crucial, as they result in dramatically different RMD numbers. 

Another major change in retirement planning is in the area of Substantially Equal Periodic Payments, sometimes referred to as 72(t) distributions, since that’s the Internal Revenue Code that governs these distributions. Substantially Equal Periodic Payments allow taxpayers to take money out of retirement accounts prior to reaching the magic 59 ½ age without having to pay that pesky 10% penalty. The rules established by § 72 (t) are complicated and unforgiving; a misstep can result in years’ worth of penalties and interest being levied.

All in all, SECURE is a game-changer for all taxpayers with retirement accounts!

To learn more, and get a free CPE credit, check out the course!