RMD Clarity

December 2, 2020 - Published by IAG Wealth Partners

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Out of the generosity of its heart, Congress waived most Required Minimum Distributions (RMDs) in 2020. They will likely be back in 2021.

RMDs are the proscribed annual amount that folks over age 72 must take from their tax-deferred retirement plans to fulfill their promise to the government that they will pay income taxes on their accounts.

They also apply to nonspousal inherited retirement accounts where the previous owner passed away before January 1, 2020.

Your RMD amount is based on a combination of your December 31 account value and your age. The IRS provides handy life expectancy tables for you to calculate the number of years over which you must empty your account, proving that they are secretly in charge of both unavoidables (death and taxes).

Earlier this year the IRS proposed updating their 2002 life expectancy tables for 2021 to reflect longer life expectancies. It took much longer than anticipated for these new tables to navigate regulatory requirements, but they were finally finalized on November 12 and their effective date has been postponed to 2022.

In 2022 a 72-year-old’s life expectancy will increase from 25.6 years to 27.4 years – a gain of 1.8 years. 80-year-olds gain 1.5 years of life expectancy, 90-year-olds gain .8 years, and 100-year-olds gain .1 years.* The IRS even expanded their table from 114 years to 120 years where, in a moment of great generosity, the IRS believes you still have two years of life left in you.

The practical impact of these changes will be slightly lower RMDs starting in 2022. For example, a 72-year old with an IRA valued at $500,000 on December 31, 2020, will be required to withdraw and pay taxes on $19,531.25 in 2021. Assuming the same account value, a 72-year-old will be required to withdraw and pay taxes on $18,248.18 in 2022. The new life expectancy tables reduce a 72-year-olds RMD by $1,283.07.

The delayed implementation of these new life expectancy tables will result in three different RMD rules in three consecutive years – no RMDs in 2020, likely RMDs based on old tables in 2021, and RMDs based on new tables in 2022. And just last month two leaders in the U.S. House of Representatives introduced a bipartisan bill to further revise RMD rules in 2022 and beyond.

As always, we will continue to closely monitor any legislative or regulatory changes to retirement account rules and will proactively help you adapt your personal strategy to maximize benefits or minimize damage to your financial plan. Please be sure to work closely with a qualified tax advisor for your personal tax planning needs.



Quote of the week: Will Rogers: “The only difference between death and taxes is that death doesn’t get worse every time Congress meets.”

*Source: IRS Publication 590B-2019 Appendix B; Federal Register RIN1545-BP11

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Any opinions are those of IAG and not necessarily those of LPL Financial. Expressions of opinion are as of this date and are subject to change without notice. This information is not intended as a solicitation or an offer to buy or sell any security referred to herein. No strategy assures success or protects against loss. Investing involves risk including loss of principal.

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