There are roughly 50 million Americans subject to the IRS’s required minimum distribution (RMD) rules for retirement accounts. The RMD rule, which kicks in at age 72 (or 70 ½ in 2019 and earlier), requires account holders of several different types of retirement accounts, including 401k, 403b, and IRAs (and other defined contribution plans), to take an annual distribution or be faced with a substantial penalty. Significant changes were made to RMDs when the Setting Every Community Up for Retirement Enhancement (SECURE) Act outlined several changes to RMDs, including increasing the age accountholders need to begin taking these distributions. Treasury recently released proposed regulations REG-105954-20 designed to update the rules governing RMDs and create alignment with the changes outlined in the SECURE Act. If passed, the rules would apply to RMD determinations starting in 2022. To help clients, prospects, and others, JLK Rosenberger has provided a summary of key details below.
RMD Changes in the SECURE Act
Required minimum distributions (RMDs) are the smallest amount that taxpayers over the age of 72 must take out of certain retirement plans each year or face a 50 percent excise tax on any amount not distributed. Distributions can be more than the minimum, though they are all considered taxable income, except for Roth IRA distributions or any amount that was previously taxed.
RMDs apply to all employer-sponsored plans, such as 401(k), 403(b), and 457(b) accounts. Both traditional and Roth 401(k) accounts require RMDs. IRAs, SEP IRAs, SIMPLE IRAs are also included; however, Roth IRAs don’t require an RMD until the account holder dies.
The SECURE Act, passed in December 2019, made sweeping changes to retirement plans, especially RMD rules. Most notably, the legislation:
- Extended the age in which RMDs -commence from age 70 ½ by April 1 of the following year to age 72.
- Requires that the entire balance of a defined contribution plan or IRA be distributed within ten years of the participant’s or account holder’s death; there are exceptions to this rule.
After the SECURE Act was passed, the AICPA asked for clarification on several issues. Proposed regulations issued in February 2022 addressed those and other concerns to bring retirement rules in conformity with one another.
February 2022 Proposed RMD Regulations
The proposed regulations affect administrators and participants of the same plans that require RMDs. Some updates simply clarify statutory rules in the SECURE Act, while others provide updates to how calculations are performed. In total, the proposal addresses the required timeline for distributions after the participant or account holder’s death, and how spouses and beneficiaries are treated and defined under statutory rules, rollovers, and annuity distributions.
Rules for Beneficiaries
Following the death of the participant or account holder, the required timeline of RMDs depends on how the beneficiary is treated. If an eligible beneficiary is named, the account balance does not have to be liquidated within ten years of the decedent’s passing.
Under the proposed rules, if there is more than one designated beneficiary, but one of them is ineligible, it will be as if there are no eligible designated beneficiaries.
- Surviving spouse
- Child under the age of majority
- Moving forward, this will be 21; however, defined benefit plans may continue to use their existing definition of the age of majority.
- Disabled or chronically ill individual
- The full definition of Code Section 72(m)(7) (26 U.S.C. § 72(m)(7)) is used to determine disabled or chronically ill. Alternatively, a safe harbor exists wherein an individual will be considered disabled within the bounds of the Social Security Act. There are other documentation requirements.
- Other individual who is at most ten years younger
Rules for Defined Contribution Plans
Calculating the RMD from defined contribution plans is mostly the same as before. There are modified rules for calculating distributions while the account holder is alive and specifications for when a full distribution might be required. Calculating distributions based on multiple beneficiaries’ life expectancies did change. Under new regulations, distributions will be calculated based on the oldest beneficiary’s life expectancy, not the youngest.
Regarding distributions after the account holder’s death, if the first required distribution wasn’t taken yet and there is at least one eligible beneficiary, certain rules would apply for defined contribution plans. The plan can provide an option to eligible beneficiaries to either take the ten-year distribution rule or elect to distribute the decedent’s plan funds over the course of the beneficiary’s life or life expectancy. If the beneficiary is disregarded, plan funds must be fully distributed within ten years.
Rules for Defined Benefit Plans
The beginning age for RMDs in defined benefit plans increases to age 72 – the same change was made to RMDs in 403(b) plans. This aligns with SECURE Act changes. Further, proposed regulations provide for an exception to the defined benefit five-year rule. Payments can be extended past five years if payments started by the fifth year after the account holder’s death and the payments are accelerated according to Section 436(d).
Payments for defined benefit plans or annuity contracts cannot be increased; however, there are exceptions to this long-standing rule. The proposed rules clarified how to calculate RMDs in defined benefit plans for actuarial increases – these increases don’t apply to five percent owners.
Annuity providers must also be licensed, which is a new requirement for annuity contracts.
Other Proposed Changes
Many retirees have more than one retirement plan, which can cause confusion when it’s time to calculate RMDs. For its part, the proposed regulation stipulates that when there’s more than one qualified plan, the plans cannot be combined for purposes of determining whether RMD requirements have been met. In other words: participants must take RMDs from each individual account.
Taxpayers that don’t need the income from RMDs but are still required to withdraw funds can still make a qualified charitable distribution. In that case, the distribution would be tax-free, and the taxpayer could simultaneously meet their philanthropic objectives.
Public comments are currently being accepted, and a final hearing will take place on June 15, 2022. If passed as written, the regulations would take effect as of January 1, 2022.
At the end of the day, figuring out RMD calculations is still complex. Taxpayers need to ensure they’re following regulations while navigating their own tax and wealth strategies.
We’re here to help
The changes outlined in the proposed rules provide important details and insights into how the IRS intends to implement the changes outlined in the SECURE Act. If passed, they will become effective in 2022, so it is important to become familiar with them to ensure plan operations are compliant. If you have questions about the information outlined above or need assistance with your benefit plan audit, JLK Rosenberger can help. For additional information, call 972-331-5917 or click here to contact us. We look forward to speaking with you soon.