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Required Minimum Distributions

Need to take an RMD in 2023…Perplexed?

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When is your Required Beginning Date (RBD) to take the first RMD?  Your first RMD (required minimum distribution) must have been taken by April 1 of the year following the year in which you reached 72 for those who reached age 72 by Dec. 31, 2022. The first RMD for those turning 72 after Dec. 31, 2022 must be taken by April 1 of the year following the year you turn 73. After that, your RMDs must be taken by Dec. 31 of each year.

Beneficiary of an IRA account? (Rules below apply to IRA owners who passed away after Jan. 1, 2020)

An individual non-spouse beneficiary must distribute the entire account balance by the 10th calendar year after the account owner’s death. If the IRA owner reached his required beginning date, the beneficiary must take annual RMDs based generally on his own life expectancy. These RMDs must begin by December 31 of the year after the owner’s death. Although the beneficiary must take annual RMDs, you will need to fully distribute the account within ten years from the owner’s date of death.

If the IRA owner passed away before the RBD, the RMDS are not required. However, the entire account balance must be distributed within ten years from the owner’s date of death.

The IRS is providing relief to heirs of inherited IRAs who are subject to the 10-year rule, allowing them to skip required minimum distributions in 2023. However, there are reasons why one should take an RMD in 2023, although not required:

  • If he has high medical expenses, the medical expenses will offset the RMD income eliminating the income tax on the RMD
  • By taking an RMD in 2023, he will have a smaller balance to distribute in year ten, avoiding a bunched higher RMD at higher tax rates

If an estate is the beneficiary of an IRA, and the account owner reached his RBD, the estate must make distributions based on the remaining life expectancy of the IRA owner. If the IRA owner passed away before his RBD, the assets must be completely distributed within five years of the owner’s passing, but no annual RMD is required.

IRA owner passed away in 2023? If the IRA owner passed away in 2023 prior to taking this year’s RMD, the beneficiary, whether an individual or an estate must distribute the RMD by the end of 2023.

Want to save income taxes on the RMD? – Use a Qualified Charitable Distribution (QCD) in 2023 For IRA owners with charitable intentions, there is a substantial tax benefit using a QCD. The owner contributes all or part of his RMD to charity. The portion contributed to charity will not be taxed. QCDs can be made as early as age 70.5, even though minimum distributions are not required until age 73. A QCD may only be made by an original account owner, not by a beneficiary.

What happens if I don’t take the RMD in 2023? If an account owner fails to withdraw an RMD, the amount not withdrawn is taxed at 25% (reduced from 50% for missed RMDs prior to Dec. 31, 2022).

Still confused? Everyone’s situation is different. Please consult with a tax advisor at Urbach & Avraham, CPAs, to analyze the impact on your personal situation.

 

ABCs of 2022 RMDs

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Perplexed? Need to take an RMD in 2022? 

Over age 72? – The age for withdrawing from retirement accounts was increased in 2020 from 70.5 to 72. Your first RMD (required minimum distribution) must be taken by April 1 of the year following the year in which you turn 72. After that, your RMDs must be taken by Dec. 31 of each year. However, if you became 72 in 2022, you may want to withdraw the first RMD in 2022. This will avoid having two RMDs in 2023 and bunching income into higher tax brackets. 

Beneficiary of an IRA account?- An individual non-spouse beneficiary must begin taking RMDs on the basis of his/her own life expectancy by Dec.31 of the year after the owner’s death. If the original account owner passed away in 2022 prior to taking this year’s RMD, it still must be withdrawn. The responsibility for taking the year-of-death RMD falls to the beneficiary.

Although the RMDs are calculated based on the beneficiary’s life expectancy, if the original account owner died after Jan. 1, 2020, you need to fully distribute the account within ten years from the owner’s date of death. In year ten, the balance of the account must be distributed. 

If an estate is the beneficiary of an IRA, and the account owner reached age 72, the distributions would be based on the remaining single life expectancy of the IRA owner. If the original account owner passed away in 2022 prior to taking this year’s RMD, the estate must withdraw it by the end of the year. If the owner was younger than 72, the assets must be completely distributed within five years of the owner’s passing, but no annual RMD is required. 

Want to save taxes on the RMD? – Use a Qualified Charitable Distribution (QCD) in 2022 For IRA owners with charitable intentions, there is a huge tax benefit using a QCD. The owner contributes all or part of his RMD to charity. The portion contributed to charity will not be taxed. QCDs can be made as early as age 70.5, even though minimum distributions are not required until age 72. A QCD may only be made by an original account owner, not by a beneficiary. 

What happens if I don’t take the RMD in 2022? If an account owner fails to withdraw a RMD, the amount not withdrawn is taxed at 50%. 

Still perplexed? Everyone’s situation is different. Please consult with a tax advisor at Urbach & Avraham, CPAs, to analyze the impact on your personal situation.

 

You can reverse a 2020 RMD by Aug. 31, 2020

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RMD Background

A required minimum distribution, or RMD, is the amount of money one is required to withdraw from most retirement accounts after he or she attains a certain age. Beginning in 2020 the Secure Act raised that age from 70½ to age 72. Almost all retirement accounts are affected by the RMD rules. The one major exception is Roth IRAs.

RMDs for 2020

The CARES Act suspended most RMD payments for 2020. Any taxpayer with an RMD due in 2020 from an IRA, an inherited IRA, a 401(k) or 403(b) or defined-contribution retirement plan may skip those RMDs this year. Defined benefit plans are not exempt from RMDs for 2020.

Owners of IRAs, 401(k) plans or beneficiaries of inherited IRAs who already received an RMD in 2020 have until August 31, 2020 to rollover or repay the distribution to the retirement plan. This reversal of the 2020 RMD is intended to benefit older Americans who can refrain from taking money out, making it easier for their balances to recover from the 2020 decline in security values.

Who will benefit?

The ability to reverse a 2020 RMD is not expected to help the majority of retirement account owners who rely on the retirement income to live from. This IRS provision will generally only help those who are less reliant on their retirement account funds for their living expenses. Taxpayers in high brackets stand to benefit from saving the steep income tax and keeping funds longer in a tax-deferred account.  Individuals with extremely high medical expenses in 2020, should not consider reversing the 2020 RMD. The steep medical expenses will shelter the RMD from taxes.

Don’t forget the withholding!

One must return the entire amount of the 2020 RMD to your retirement account by August 31, 2020 to qualify as a reversal. Many individuals have income tax withheld from the RMD. The income tax withheld also has to be returned – not just the amount received. The amount withheld will be credited to your 2020 income tax return. This can reduce the amount of your September and December 2020 estimated income tax payments.

Example of withholding from RMD and reversal

Retired Rita withdrew an RMD of $50,000 in Feb 2020. She had $10,000 of federal income tax withheld from her RMD and received $40,000. If Rita would like to reverse the RMD she must return the entire $50,000 to her retirement account by August 31, 2020 even though she received only $40,000. On her 2020 US Income Tax Return (Form 1040) she will receive credit for the $10,000 of income tax withheld. This will enable her to reduce her third and fourth quarter 2020 US estimated income tax payments.

Look before you leap!

Everyone’s tax situation is different. If you feel you can benefit from the 2020 RMD reversal, contact your investment advisor. You should also contact our tax accountants at Urbach & Avraham, CPAs this week to assist you in the decision.