The New, Known and Unknown With Required Minimum Distributions: 2022 Year-End Update

HOST: MIKE KIRKMAN: I am Mike Kirkman. I'm a partner with Cherry Bekaert, and I lead our firm's estate, gift, and trust practice.

HOST: MIKE KIRKMAN: Today I have with me Deb Walker, our firm's national leader of compensation and benefits. We're discussing required minimum distributions, what we know, what is new, and what is unknown. This area tends to cause a lot of confusion for taxpayers and can result in significant penalties if not handled correctly.

HOST: MIKE KIRKMAN: Deb, let's jump right in. In general, what are required minimum distributions, or RMDs?

DEB WALKER: Required minimum distributions are required distributions from a retirement plan, an IRA, or an employer-sponsored retirement plan. Congress wanted to ensure that retirement savings were actually used for retirement, so it instituted RMDs beginning originally at age 70½, which later moved to age 72.

DEB WALKER: When you reach your required minimum distribution age, you must begin taking distributions from retirement plans, and in most cases those amounts are included in income. There are many rules about how much must be taken and when, including special rules that apply at death for retirement savings, depending on whether distributions had begun.

DEB WALKER: Generally, RMDs are distributions required because a taxpayer has reached age 72. For someone participating in a qualified retirement plan sponsored by an employer, if the participant is still employed and is not a 5% owner, the age-72 requirement does not apply; instead, RMDs begin when employment terminates. For IRAs, the RMD age is 72, and if you are a 5% owner in an employer plan, the RMD age is 72.

HOST: MIKE KIRKMAN: Many individuals take their RMDs for a calendar year in December. Did the IRS provide any relief for RMDs in 2021 and 2022?

DEB WALKER: Many people take RMDs at the end of the year because they want earnings to accumulate tax-deferred or tax-free as long as possible. The IRS provided very limited relief that applies to inherited IRAs.

DEB WALKER: Proposed regulations require distributions from inherited IRAs to be made over a 10-year period with annual distributions. This is a change from existing regulations that required distributions within five years. Because this change is controversial, the IRS has not finalized the regulations, so we do not know what the final rules will say.

DEB WALKER: Some people hope an inheriting beneficiary can wait 10 years and then take the total amount at the end of the period. Based on discussions with those working on the regulations, I do not believe the IRS will allow everyone to wait the full 10 years without annual distributions, but we must wait for final regulations to know for sure.

DEB WALKER: For inherited IRAs, if the decedent died after 2019, heirs do not have to take an RMD for 2021 or 2022 under current guidance. For people who died in 2020, 2021, or 2022, their heirs would be required to take distributions under the proposed approach. Because final regulations have not been issued, there is currently no requirement to take a distribution for inherited IRAs for 2021 or 2022, and I would advise beneficiaries not to take distributions for those years.

HOST: MIKE KIRKMAN: Given the uncertainty about Congressional action or IRS guidance, what should taxpayers be considering at year-end?

DEB WALKER: If you have an inherited IRA, I recommend not taking any distribution as an RMD if you do not need the money. If you have already taken an RMD from an inherited IRA, you cannot roll it back into an IRA if more than 60 days have passed since the distribution. If it is within 60 days, you can roll it over and it would not be treated as an RMD.

DEB WALKER: For regular IRAs, if you are age 72 or older, you need to take an RMD. Some in Congress hope the RMD for 2022 will be eliminated as it was in 2020, but I doubt that will happen. I recommend taking your RMD now.

DEB WALKER: If Congress eliminates RMDs for 2022 after you have taken the distribution, you may roll the amounts back into an IRA within 60 days and not include them in income for 2022. If you turn 72 in 2022, you can take the RMD in 2022 or delay until the first three months of 2023, but delaying may result in taking two RMDs in 2023. That decision depends on your individual tax situation.

HOST: MIKE KIRKMAN: If someone with an inherited IRA wants to be safe and avoid potential penalties if an RMD is required for 2022, could they take the distribution now and have time to roll it back if guidance changes?

DEB WALKER: Yes. If you take a distribution and there is no required minimum distribution rule, you can roll the money back within 60 days. Notice 2022-53 indicates there is no required minimum distribution for inherited IRAs in 2022. I do not expect final regulations before next summer, so changes to inherited IRA rules are unlikely before then.

DEB WALKER: Pending legislation may change the RMD age, with proposals generally applying to people age 71 or younger to delay the age at which RMDs begin. Because delaying RMDs leaves money in retirement accounts longer and reduces taxable income, these changes affect revenue and have staggered effective dates in proposals, such as moving the age to 73 next year, 75 three years from now, and 77 four years from now.

DEB WALKER: For now, if you are 72 this year or older, you need to be taking RMDs from your IRAs. If you have money in an employer plan and you are a 5% owner, you also need to be taking RMDs.

HOST: MIKE KIRKMAN: Thank you, Deb, for your insight.

HOST: MIKE KIRKMAN: If you have questions, reach out to us at cbh.com/PCS.