The Department of Treasury issued new tables that will reduce the amount of the annual required minimum distributions (RMDs) that an individual must receive from a qualified retirement plan, beginning in 2022.1 The reduced distributions are a result of updating the life expectancy tables for longer life expectancies from the time that the prior tables had been published in 2002. Most individuals will experience reduced RMD amounts of between 0.3% and 0.5% of what they would have had to receive under the prior tables.
Lifetime Distributions
Lifetime RMDs must be taken from an individual’s retirement account every year, beginning in the year that the individual attains age 72.2 Failure to receive the full amount of the RMD will trigger a 50% excise tax on the shortfall.3
With one exception, lifetime RMDs are computed from a uniform table. The RMDs for 2021 and for 2022 (and beyond) appear in “Uniform Lifetime Distributions,” p. 47.
There are two simple steps to determine the RMD for any year:
Step 1: Find out the value of your investments in your retirement plan account on the last day of the preceding year. For example, on New Years Day, look at the closing stock prices for Dec. 31.
Step 2: Multiply the value of your investments by the percentage in the table that’s next to the age that you’ll be at the end of the year. This is the minimum amount that you must receive in the year to avoid a 50% excise tax. Let’s look at an example:
Ann T. Emm had $100,000 in her only IRA at midnight on Dec. 31. She’ll be age 80 at the end of this year. In 2021, she must receive at least $5,350 during the year to avoid a 50% excise tax (5.35% x $100,000). If she had attained age 80 in 2022, she would only need to receive at least $4,950 during the year to avoid the 50% excise tax (4.95% x $100,000).
The one exception to the uniform table is if an individual is married to someone who’s more than 10 years younger than that individual. In that case, a reduced RMD for the year is computed based on the joint life expectancy of that individual and the younger spouse.4 The basic RMD table for lifetime distributions was computed based on the joint life expectancy of an individual and someone who’s 10 years younger.5
IRAs
For accounts inherited from individuals who died after 2019, the Setting Every Community Up for Retirement Enhancement (SECURE) Act provides that an inherited account must generally be liquidated by the end of the 10th year after the year of death.6 There are no RMDs in the first nine years. The test is simply applied on the last day of the 10th year. If any amounts are still in a retirement account at the end of the 10th year, the 50% excise tax will generally apply to it.7
However, three categories of beneficiaries are eligible to receive distributions over more than 10 years. Such a beneficiary may receive distributions from an inherited IRA over their remaining life expectancy (or over a life expectancy of someone who was the decedent’s age in the year of death). Such an arrangement has commonly been referred to as a “stretch IRA.” In that case, an RMD from the inherited account is generally required every year beginning in the year after the decedent’s death.
For such beneficiaries, there’s a “one-time reset” of the life expectancy assumptions in 2022 that will reduce amounts that would otherwise have to be distributed. The regulations contain a helpful example of how the one-time reset will apply in 2022 to an individual who inherited a retirement account from someone who died before 2020.8 The life expectancy numbers to make the computations in 2021 and 2022 (and beyond) appear in “Life Expectancy,” p. 48.
The beneficiaries who are eligible to use these life expectancy rules include:
1. A designated beneficiary of an account held by an individual who died before the year 2020;9
2. In the case of an account inherited from someone who died after 2019, an eligible designated beneficiary (EBD) may receive distributions over their remaining life expectancy. An EDB is a surviving spouse, a minor child of the decedent, a disabled individual, a chronically ill individual or someone who isn’t more than 10 years younger than the decedent (for example, a partner or a sibling);10
3. A beneficiary of a retirement account of an individual who died after the required beginning date (that is, after April 1 of the year after the individual attained age 72) when there was “no designated beneficiary” (for example, a charity or the probate estate was also a beneficiary on the determination date).11
Endnotes
1. Treasury Decision 9930 (Nov. 5, 2020), https://public-inspection.federalregister.gov/2020-24723.pdf. The rules apply to qualified employer plans described in Internal Revenue Code Section 401 (IRC Section 401(k)), profit sharing plans and stock bonus plans (such as employee stock ownership plans), individual retirement accounts, IRC Section 403(b) tax-sheltered annuities and IRC Section 457(b) plans. See IRC Section 4974.
2. Section 401(a)(9) and IRC Section 408(a)(6). If an individual failed to receive distributions in the year they attained age 72, the requirement can be met by receiving the required minimum distribution (RMD) in January, February or March of the following year. The required beginning date is generally April 1 of the year after attaining age 72. Section 401(a)(9)(C). In subsequent years, RMDs must be received during the calendar year to avoid the 50% penalty.
3. Section 4974(a).
4. The Department of Treasury published a complete set of joint life expectancy tables in the updated regulations. Treasury Regulations Section 1.401(a)(9)-9(d) Joint and Last Survivor Table. These new tables will ultimately appear in Internal Revenue Service Publication 590-B when that publication is updated for the year 2022. www.irs.gov/pub/irs-pdf/p590b.pdf.
5. Thus, for example, whereas an 80-year-old individual has a remaining life expectancy of 11.2 years, the joint life expectancy of an 80 year old and a 70 year old is 20.2 years (on average, the second of the two individuals will die in 20.2 years). Hence, the RMD for an 80 year old is 4.95% (1/20.2 = .0495).
6. Section 401(a)(9)(H)(i).
7. See supra note 3.
8. Treas. Regs. Section 1.409(a)(9)-9(f)(2)(ii)(B):
Assume that an employee died at age 80 in 2019 and the employee’s designated beneficiary (who was not the employee’s spouse) was age 75 in the year of the employee’s death. For 2020, the distribution period that would have applied for the beneficiary was 12.7 years (the period applicable for a 76-year-old under the Single Life Table in formerly applicable section 1.401(a)(9)-9), and for 2021, it would have been 11.7 years (the original distribution period, reduced by one year). For 2022, if the designated beneficiary is still alive, then the applicable distribution period would be 12.1 years (the 14.1-year life expectancy for a 76-year-old under the Single Life Table in paragraph (b) of this section, reduced by two years). However, see section 401(a)(9)(H)(iii) for rules regarding how to apply the required distribution rules to defined contribution plans if the eligible designated beneficiary dies prior to distribution of the employee’s entire interest.
9. Ibid.
10. Sections 401(a)(9)(E)(ii) and 401(a)(9)(H)(ii) and (iv). Note that a surviving spouse has the option to roll over the deceased spouse’s retirement assets to a new IRA, which will usually provide greater income tax benefits than liquidating an inherited account over the surviving spouse’s remaining life expectancy. If the eligible designated beneficiary is a minor child, the 10-year rule generally begins when the child attains the age of majority.
11. The preamble to the regulations provides that the life expectancy of someone who was the decedent’s age applies if the individual died after the required beginning date with “no designated beneficiary.” The preamble states: “The employee died after the required beginning date without a designated beneficiary (so that the applicable distribution period under §1.401(a)(9)-5, Q&A-5(c)(3), is determined based on the remaining life expectancy of the employee for the year of the employee’s death)” (emphasis added).