Among the most complicated and frustrating individual retirement account (IRA) rules are required minimum distributions (RMDs). The government allows you to delay paying tax on traditional IRA contributions or retirement deferrals in order to encourage you to save for your retirement. But after a certain age, the government requires you to take some of that money out so they can collect taxes on it. The amount the government mandates you take out of your account each year is called a Required Minimum Distribution (RMD).
Naturally, I had just finished writing “The Full Complexity of All Required Minimum Distribution Divisors Explained” in June 2019 when a few weeks later we found out that the SECURE Act of 2019 was on the horizon proposing a new design of inherited RMD rules.
Now that the SECURE Act is law, it is time for me to update the rules on RMDs. So, here is my attempt to give an overview of all of the complexity in Required Minimum Distribution divisors and how to handle each of these cases.
Major changes are:
- The required beginning date was changed from age 70 1/2 to 72.
- Inherited IRA RMDs have entirely new rules.
- Second generation beneficiaries are no longer provided any possibility of stretch provisions.
You own an pre-tax IRA, such as a Traditional IRA, Rollover IRA, SEP-IRA, or SIMPLE IRA, and…
You are younger than 72.
Before the year you turn 72, no required minimum distributions are required for the IRA owner. Also, Roth IRAs are not subject to RMDs for the IRA owner at any age.
You are turning 72.
The year that you turn 72 is called your “required beginning date.” This is the first year you must take a RMD.
Your first RMD must be taken after January 1 of your required beginning date year and before April 1 of the following year. The April deadline is a one-time extension of the RMD deadline for just your first year.
Normally, it is better to take your first RMD in the year you reach age 72 without delaying into the one-time extension. Delaying into the following year will require you to take two RMDs that year, increasing your taxes that much more.
You may want to delay if you are going to retire the next year. In that extremely coincidental case, postponing the first withdrawal until the year your income is lower may save you money.
You may also benefit from delaying if you are considering giving away all or most of both RMDs as Qualified Charitable Distributions (QCDs), as QCDs are exempt from taxable income anyway and then you can save time by bundling the paperwork preparation for both years.
You are older than 72.
After your first year, you need to take your RMD during the year and before December 31 every year you have an IRA balance.
Your primary beneficiary is a spouse who is more than 10 years younger.
The IRS has a quirky rule that if your 10-years-or-more younger spouse is your sole primary beneficiary, then you can use the lower Joint Divisor based on both your life expectancies rather than just your own.
The Joint Divisor is an alternate and more favorable RMD calculation. If you are a mixed-decade couple, take advantage of the Joint Divisor by making your spouse your primary and sole beneficiary for your IRA and use the Joint Life and Last Survivor Expectancy Table to find your RMD or you can use our RMD Calculator.
You can read more about this in “RMD Mistake: Not Using the Joint Divisor.”
Your primary beneficiary is someone or something else.
You own an employer-sponsored retirement account, such as a 401(k), 403(b), or 457(b) plan.
If you do not own the company, employer-sponsored plans like 401(k), 403(b), and 457 plans are only subject to RMDs in the year you both reach age 72 and are terminated from your employment with the sponsoring employer.
However, if you are more than a 5% owner of the company that sponsors the plan, then you must start RMDs in the year you reach age 72 regardless of whether you are still employed.
Anyone who has to take RMDs from their employer-sponsored retirement plan, sadly, has to take RMDs from all components of the plan. This includes traditional employee deferrals, profit sharing, employer match, and even Roth deferrals!
You can read more about this in “When to Get Your Money Out of Your 401(k), Especially Plan Owners.”
The RMD rules for employer-sponsored retirement accounts are otherwise the same as those for IRA accounts.
You inherited a retirement account from…
When a spouse inherits retirement account assets, they have the right to do what is called a “Spousal Rollover” or “Spousal Transfer.” This is simply a transfer of ownership of the assets from the decedent to the spouse either via a rollover to a new account (the cleanest accounting) or by just treating the decedent’s IRA as though it were your own.
If you do the spousal rollover, that means you never need to take inherited RMDs but instead treat the assets as though they were your own, taking RMDs from the account per usual when you are over age 72. This makes a huge difference. Read “RMD Mistake: Missing a Spousal Rollover” for more information.
It used to be that if the decedent died after his required beginning date, then the heir had the option of taking the original owner’s RMDs. However, this option was removed during the SECURE Act. Now, what kind of inherited RMD you have to take depends on how you inherit the assets and who you are.
If you inherit the IRA through probate (the reading of the Will) and the decedent’s estate was not named as the designated beneficiary on the account, then the balance of the IRA must be distributed within 5 years of the decedent’s death. This rule applies even if a Trust inherited the account from probate and then you later inherited the account from that Trust instrument.
If the decedent’s estate was designated as a beneficiary, then in a Private Letter Ruling, the IRS set the precedent that even probate and the successive heirs named there can qualify for the beneficiary designation exception, described below.
If you cannot trace your inheritance back to a beneficiary designation, then you must distribute all of the account’s assets within 5 years. This means take the year of the previous owner’s death, add five, and on December 31st of that year, the balance of the account needs to be $0.
A beneficiary designation
Non-spouse designated beneficiaries are permitted an exception to the 5-Year rule, but it matters whether you are eligible or not eligible what exception exactly you will receive.
…and you are…
An eligible designated beneficiary (spouse, child, disabled, chronically ill, or within 10 years in age of the decedent).
Under the SECURE act, an “eligible designated beneficiary” is defined as only someone who is:
- the surviving spouse of the employee,
- subject to clause (iii), a child of the employee who has not reached majority (within the meaning of subparagraph (F)),
- disabled (within the meaning of section 72(m)(7)),
- a chronically ill individual (within the meaning of section 7702B(c)(2), except that the requirements of subparagraph (A)(i) thereof shall only be treated as met if there is a certification that, as of such date, the period of inability described in such subparagraph with respect to the individual is an indefinite one which is reasonably expected to be lengthy in nature), or
- an individual not described in any of the preceding subclauses who is not more than 10 years younger than the employee.
The child exception clause iii states:
Subject to subparagraph (F), an individual described in clause (ii)(II) shall cease to be an eligible designated beneficiary as of the date the individual reaches majority and any remainder of the portion of the individual’s interest to which subparagraph (H)(ii) applies shall be distributed within 10 years after such date.
This means that a healthy, non-nuclear family member who is more than 10 years younger than the decedent is never eligible for stretch provisions. Furthermore, children of the decedent are only granted stretch provisions until they are of majority age. Spouses are still given their spousal rollover, although they can also have stretch. So it is really only the disabled or chronically ill who are given stretch provisions for their lifetime.
In this case, stretch provisions means using the Single Life Table to calculate their Inherited RMD divisor. Unlike Uniform or Joint divisors where you need to look up your new divisor on the table each year, the Single Life Table is used once in the year after the decedent dies. Then, in each successive year you subtract one from that fixed divisor to get the next year’s divisor. In this way, if your first divisor was 40.7, then you will distribute the entire account in 40 years.
Not an eligible designated beneficiary.
If you are not an eligible beneficiary, then the entire account must be distributed within 10 years regardless of the original IRA owner’s required beginning date or your age.
…holding the account…
If you own the assets outright, free of trust, and in your name, then nothing changes in how you take your RMD.
If the trust can trace its inheritance back to a beneficiary designation and the beneficiary(ies) of the trust are eligible beneficiaries, then in order to qualify for the eligible beneficiary special RMD stretch provisions, there are a few other details that must be met.
The main provision that must be met is, if the trust has more that one beneficiary, then either the trust assets need to be divided upon the death of the original IRA owner into separate trusts, one for each beneficiary, or the eligible designated beneficiary needs to be the only beneficiary who has a right to any of the assets in the inherited IRA. In general, if this provision is not met, then the eligible beneficiary’s portion of the trust will not be permitted to use stretch provisions even though they would have been otherwise eligible.
You inherited an Inherited IRA from…
An eligible designated beneficiary.
However, the SECURE Act removes this clause stating, “If an eligible designated beneficiary dies before the portion of the employee’s interest to which this subparagraph applies is entirely distributed, the exception under clause (iii) shall not apply to any beneficiary of such eligible designated beneficiary and the remainder of such portion shall be distributed within 10 years after the death of such eligible designated beneficiary.”
This means that a second generation beneficiary of an eligible designed beneficiary would need to distribute the whole IRA within 10 years of the first beneficiary’s death, even if they themselves could have been eligible.
A non-eligible designated beneficiary.
Unfortunately, it is my understanding that a second generation non-eligible beneficiary does not have the clock reset. Instead, the original beneficiary’s 10-year deadline remains in effect for the second generation heir.
Photo by Daniel Lincoln on Unsplash