RMDs – Round 2
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February 7th, 2022
In this week’s blog, Tom O’Saben discusses the new RMD tables for 2022 that impact how much must be withdrawn from IRAs and qualified plans each year. Tom also reminds us of other changes the SECURE Act made to contributing and making withdrawals from retirement savings.
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Hello again, everybody Tom O’Saben coming to you from the University of Illinois Tax School with our tax season blog of the week. We’re hoping that tax season is starting off to be not too bad for you this year, although we’re expecting a lot of issues to come up. So I thought I’d take a little snippet of your time as as you get your day going. And this week, we’re going to talk about 2022 Required Minimum Distributions. Again, for those of you don’t know me, my name is Tom O’Saben. I’m an Enrolled Agent. I’m the Assistant Director for Professional Education and Outreach for the Tax School. I’m a Fall Tax School instructor and author and reviewer of the University of Illinois Federal Tax Workbook. I do our blogs, a lot of Facebook postings, webinars. And in addition to that, I’ve been a tax tax practitioner for over 30 years. So I understand and I feel your pain and what you’re going through each and every year during this really, really hectic time of the year. So we’re going to talk about Required Minimum Distributions. And kind of an overview of our brief discussion today, I want to give a reminder that RMDs were only suspended for 2020. So they’ve been back for a year. So clients who were in RMD years in 2021, needed to make those distributions. I also want to remind you that the Secure Act revised the beginning RMD age from 70 and a half to age 72. But we have to be careful there. That’s for those persons who were born after June 30 1949. So what do we mean by that? People who were already over age 70 and a half are at seven and a half, at the end of 2019 don’t start over. So they don’t go to age 72. They keep on taking their RMDs. But they also receive that reprieve for 2020 as did anyone else who was requiring an RMD. There were no RMD requirements in 2020.The most important thing I want to tell you about is that beginning with 2022, the IRS has new RMD tables, which basically they reduce the amount a retirement plan participant must withdraw. And it’s in response to the fact that people are living longer, I will tell you, if you were to go to irs.gov right now, and you would look at Publication 590 B, it is not yet updated for the new RMD table for 2022. So what I put here for you is comparing the RMD tables, and I’m using the uniform table. Basically, because this is the one most commonly used. Well, if you look at what the uniform lifetime table was before 2022, and I circled someone who’s age 72, you’ll notice that it did start at age 70. But at age 72, we have a factor of 25.6. You see that – 25.6? So that’s really a divisor. So you take the value of the IRA at the end of the previous year, divide it by 25.6, and that will tell you the RMD for the year. Now look at the right side of the screen here. And you’ll notice that – I’m going to draw an arrow here – you’ll notice that for age 72, the divisor is now 27.4. So you would take the value as of the end of the previous year divided by 27.4 instead of 25.6. So if you were to take a look, for example, at the chart of where it was before, that 27.4 was the equivalent of age 70 under the old rules, wasn’t it? So that in essence has moved forward two years. That’s really what we’re seeing our charts see or do is that the same divisor has been used, but two years later in life, to reflect the fact that people are living longer, or at least life expectancies are longer.
So let’s use an example here comparing the old and the new rules. So we’ve got someone, Mary, who turned 72 in 2022. She has $250,000 in IRAs, and that was the value as of December 31 of last year. If we didn’t have a revised table, just as I told you as we were looking at the table, we would have taken the 250,000 divided by 25.6. And that would have given us a $9,766 RMD. Well, now the new table tells us we take that same $250,000 and we divide it by 27.4, which gives us an RMD of $9,124. So that’s roughly about 600 and roughly $5,640 less that Mary has to take out based on the fact that life expectancy is now longer.
So here’s some conclusions to take out. Like I said, what’s really a brief hit for you to listen to as you’re facing another day of meeting with your clients. The new RMD chart, as I mentioned, basically reduces the divisor by two years, and I think you’ll all agree it’s been long overdue since life expectancies have been increasing. But I do want to mention, let’s say, for example, that you had someone who turned age 72 in 2021. But they’ve been waiting until April 1 of the year after they turned age 72. You will need to use that old chart for that 2021 distribution. But then when we look at the 2022 distribution, we’re going to switch to the new chart. Now we’re making an assumption that that’s what you do. We haven’t received any guidance from IRS, which says, well, if you were using old chart, continue to use it. I think, and we assume that beginning with 2022 distributions, or those who are intended for 2022, use the new chart But in this case where you’ve delayed that that first withdrawal until April, first of the year, after you turn age 72, you would use the 2021 table for that distribution. And then the one that has to be done by the end of this year would be the 2022 table. Nice and complicated, isn’t it.
So remember also too that the Secure Act permits persons who are in RMD years who are still working to continue to contribute to IRAs. So the kind of rub to this is – the weird part that I didn’t think made any sense at all – but they also have to be taking RMDs. So you can have people who are 75, 76, 78 years old, still working, wanting to contribute to an IRA. So they’re contributing on one hand. But on the other hand, they’re also having to take Required Minimum Distributions. Now, that isn’t the case – and that’s the second point that I’m making here – that, if the RMD person is working and contributing, for example, to a qualified retirement plan, like a 401k, you don’t include that balance in what the individual has to take for an RMD. If they’re still working, it’s only after they stop working, that the 401k balance or other qualified pension plan would have to be considered for RMD distributions. But nonetheless, that’s not the case for IRAs. We can have contributions and distributions.
So I already mentioned, but I’ll say it again, those who turned age 72 in 2021, and delayed that first RMD, remember, again, use the old chart from the slide I had several slides ago, for that first RMD, even though it’s coming out in 2022. The new 2022 RMD chart would be used by December 31 for this year’s distribution.
I also want to mention under other quick thoughts, if you have taxpayers who wish to use qualified charitable distributions, you know, these are the ones where taxpayers who are in RMD years, they can have their RMD, or an amount up to $100,000 per year, taken directly from their IRA by the trustee and directed to a qualified charity. So the money doesn’t come to the taxpayer, it goes directly from the trustee to the qualified charity. It counts for RMD. It’s not included in taxable income, but you don’t also get a potential itemized deduction for that. But with itemized deductions, or standard deductions as high as they are, a lot of people aren’t benefiting from the contribution anyway. But realize that under the Secure Act world, if we’ve got that client who’s in RMD years, and like I described earlier, they’re still working, and they decide to do a qualified charitable distribution. The simple answer I can give you is, those contributions that are made after they reach RMD years cannot be included in the amount for qualified charitable distributions. So it’s as if they don’t exist. You may have to subtract off the contributions and more than likely the earnings from that overall balance that would be eligible for QCD. So simple answer is subtract off any post RMD age IRA contributions from the amount that would be eligible for a potential QCD.
So more importantly, I want you to realize that we’re here for you. We are practitioners just like you are. O ne of the things I would suggest if you’re not a member that you go to our Facebook Group, and I’ve given you a link here to join the group (https://www.facebook.com/groups/taxschool). It is only made up of tax professionals. So you might have a specific area of expertise, or a question that someone else has a specific area of expertise can help you. I think it’s a very respectful group. And it’s provided a lot of information I will pop on from time to time, and try to give chapter and verse to questions as well.
Also during tax season, I’d encourage you to follow the weekly blogs (https://taxschool.illinois.edu/blog.html). Just like this one is recorded. I’m trying to keep them recorded so you don’t have to spend a lot of time to do more than just listen as opposed to having to read and spend devoted time, when your time is so precious. Any changes that happen – any any law changes, any interpretations, anything that I might, in fact, run into with software – we’ll get those changes posted as soon as possible. And they will typically be either on this Facebook page, or in fact, come out in a weekly blog. I don’t know what we’re going to have in terms of tax law changes, you never know what tomorrow can bring. So, we wish you peace throughout this tax season. Take some time for yourself. Take a deep breath and follow the old mantra. How do you eat an elephant? You eat it one bite at a time. So we’re here with you. We’re glad you’re a part of us, and we’re glad to assist you in any way we can. Best of luck for for now. This is Tom O’Saben. For all of us at the University of Illinois Tax School, we’ll say goodbye for just a while.
Tom O’Saben, EA
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