November 2022
Tax Planning

Required Minimum Distributions and Beneficiary IRA

By Myra Alert

With the year-end fast approaching, we would be remiss if we didn’t remind you to take your Required Minimum Distribution (RMD) before Dec 31. Here at Copperwynd our operations team has been diligently reaching out to all clients as custodians advise us of their tight processing deadlines to ensure clients’ RMDs are timely met.

Here are some questions about RMDs that we are frequently asked:

Remind me again why I have to take an RMD

After all those years of working and contributing pre-tax dollars to an employer retirement plan or an IRA, Uncle Sam is ready to start collecting on the deferred growth in those accounts when you turn 72 (the age changed from 70.5 to 72 in 2021). This also includes SEP and Simple IRAs. You have until April 1 of the following calendar year after turning 72 to take your very first RMD. After that, the annual deadline is Dec. 31.

Note: if you are still working at age 72 and beyond, no RMD is required from your current workplace retirement plan. You are, however, still required to take an RMD from your IRAs or former employer plans.

How is the RMD calculated?

An RMD is calculated by dividing the Dec 31 account balance by a life expectancy factor that can be found in IRS Publication 590-B. An RMD taken in 2022 is based on the 12-31-2021 balance and so forth.

If married and one spouse is more than 10 years younger than the other, the IRS will allow you to use a Joint Life Expectancy Table so that the RMD for the older spouse will be less.

Are there penalties for missing the Dec 31 deadline?

Yes, if you miss this annual deadline, you will be hit with a 50% penalty based on the amount of your RMD. For example, the penalty for missing a $2000 RMD will be $1000. Ouch.

Do I withdraw from each of my IRAs, or can I combine all RMDs together and take from just one IRA?

Here you have some choices. What’s important is to keep tabs on the RMDs from all of your IRAs, especially those that we don’t manage for you. In these cases, we won’t know those year-end balances unless you notify us. If you have multiple IRAs, you can add the RMDs for each account together and take the entire amount from one IRA if you prefer.

Note: If applicable, RMDs from former workplace retirement plans need to be satisfied individually. They can’t be part of an aggregated number from IRAs.

How are RMDs taxed?

Any withdrawal from a retirement account is taxed as ordinary income in the year you take it. If you made nondeductible contributions to your IRA, a portion of the amount won’t be subject to taxation. This is not the case for most taxpayers.

Is an RMD required from a Roth IRA?

No, but if you have a Roth 401(K) held at a former employer you are subject to an RMD starting at age 72. This is an unusual quirk of Roth 401(K) plans in that they are treated the same as a traditional 401(K). However, if you roll this workplace account into a Roth IRA the year before turning age 72, no RMD will be required, ever!

Can a married couple combine their RMDs?

Retirement accounts are owned individually and RMDs must be taken separately.

Isn’t there a new rule for taking an RMD from a beneficiary IRA?

Yes, but only if the deceased party passed away January 1, 2020, or later. A new IRS 10-year rule now requires that all funds from either an inherited IRA or inherited Roth IRA must be withdrawn within 10 years of the previous owner’s passing (in the past, beneficiaries could take these RMDs over their lifetime). The notable exceptions to this rule pertain to surviving spouses, minor children of the account holder, disabled or chronically ill beneficiaries, among others.

You may be aware that the IRA has been dragging its heels on the implementation of this new 10-year rule and only recently provided a bit of clarity on this topic. If you missed taking an inherited RMD in 2021 and 2022 the IRS is waiving the 50% penalty. Unfortunately, the IRS has not yet specified in what year these RMDs will begin, so if you haven’t taken your inherited RMD for 2021 or 2022 the choice is yours whether to take it or not. We hope to learn more soon.

What can I do with my RMD proceeds if I don’t need the funds?

You might consider depositing the proceeds into a taxable brokerage account if you have no immediate need for these funds. Another option: if you are at least 70-1/2 you can make a Qualified Charitable Distribution (QCD) directly from the IRA to a 501(c)(3) charity or donor advised fund. In either of these cases, the QCD will not be subject to taxation.

We are happy to entertain any questions you may have on RMDs and Beneficiary IRAs as they are often complex topics. If you’re interested in viewing the life expectancy tables for single, joint and beneficiaries, visit the IRS webpage here.

If you have questions, please contact us.

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