RMD reminders (and rule changes)

October 28, 2022

Allworth Co-CEO Scott Hanson shares a few key reminders about RMDs and explains why owners of inherited IRAs should stay in close contact with their advisor.

The end of 2022 is approaching fast, and for many of you, that means the deadline for taking a required minimum distribution (RMD) from your retirement account(s) is just ahead.

On a side note, if you believe that considerations surrounding RMDs only impact those of you who are over the age of 72, or even just those of you who inherited a retirement account from a loved one, that could be a mistake.

That’s because, first, there are RMDs, which are withdrawals you legally must take from IRAs and other employer-sponsored retirement plans, and then there is forward thinking tax and financial planning, which, depending on your current and future financial situation (and tax bracket), may mean you should be withdrawing from these types of accounts many years before the IRS says you need to.

Every person’s situation is unique.

All that, and as if (all by their lonesome) RMDs weren’t confusing enough, December 2019’s well-intentioned SECURE Act created a few additional (and still unsettled) hurdles that also need to be cleared.

As for RMDs, I’m going to begin with the easy and then move on to the … not quite as easy.

When must you begin taking RMDs?

Even the answer to this seemingly simple question isn’t perfectly straightforward.

First, aside Uncle Sam, virtually everyone loves tax-deferred retirement accounts. The money goes in pre-tax, and without so much as a wink or a phone call from the IRS, over the years it mostly seems to grow – also tax-deferred – and this is allowed to carry on uninterrupted for decades.

What’s not to like?

Well … eventually … you reach the age where the IRS wants its tribute.

Once you hit age 72, you must begin taking RMDs from your retirement accounts. But here’s where it gets a little tricky. You can delay your first RMD until April 1^st of the year after you turn 72, but after that, RMDs need to be taken by December 31^st each year.

Warning: While RMDs are not required for Roth IRAs (unless that Roth IRA is inherited), if you are the owner of a traditional IRA, 401(k), 457, or 403(b), etc., and you skip your RMD? You’ll not only receive a nasty letter from the IRS, but you’ll get gut-punched with a potentially mammoth tax penalty equal to 50% of the missed amount.

Ouch.

Why should you prepare in advance for your first RMD?

The SECURE Act pushed back the age that retirement account holders must begin taking RMDs by a full 18 months (from age 70 ½ until age 72). A further RMD lag means that if you were born later than June 30^th, 1949, as mentioned above, you have until April 1^st of the year after you turn 72 to take your first distribution.

But here’s a potential issue. Let’s say you turned 72 in September of 2022, and then want to take advantage of the lag and withdrawal your first RMD on April 3^rd of 2023. (It’s typically April 1^st, but in 2023, the 1^st of April falls on a Saturday.) Yet, something a lot of people don’t realize is, that because of the delay until the following April, you’re going to be required to take your second RMD by December 31^st, 2023.

That’s right: Two RMDs in a single calendar year.

And if you aren’t prepared for it, that single-year double dip RMD could bump you up into a higher tax bracket. So, speak with your accountant to see if perhaps you wouldn’t be better off taking your first RMD before the end of this year.

One other consideration: For you folks aged 72 or older who are still employed, so long as you don’t own 5% or more of the company you work for, you are able to delay taking an RMD from your current employer’s plan until after you retire.

Once again, however, as scheduled, based on your date of birth, you’re legally responsible for taking RMDs from any other tax deferred retirement accounts that you own.

The SECURE Act’s Impact on Retirement Account Beneficiaries

Called a Stretch IRA (which was actually a wealth-transfer method, and not an actual IRA), once upon a time, when a non-spouse inherited a retirement account, the actuarial table for the IRA beneficiary reset, and significantly lowered the RMDs as the money continued to grow tax deferred.

But the SECURE Act’s application of the “10-year Rule,” which applied to accounts inherited after December 31^st, 2019, and which mandated that you must withdrawal all monies from inherited IRAs (along with 401(k)s, Roth IRAs, etc.) within 10 years from the date of the original account holder’s death, changed that.

But here’s something else that is also due to change. At first, the way the 10-year rule was written, many tax professionals assumed that no distributions were legally required until year 10. Simply, the interpretation was that you could wait until 10 years after the original account holder’s death, collecting interest and dividends along the way, and then withdrawal all the money at once. (Though, of course, you could still have chosen to reduce those balances and potentially lower future taxable income by withdrawing money sooner.)

Then, in February 2022, in an attempt to clarify the confusion over the 10-year rule, the IRS proposed (but did not implement) amended rules, that were to go into effect in late 2022, that stipulated non-spousal beneficiaries (excluding minor children, the disabled, and beneficiaries who are less than 10 years younger than the IRA owner) would be required to take RMDs based on the old “stretch rules” (withdrawals based on the beneficiary’s life expectancy), but which also stipulated that the account(s) still had to be entirely liquidated before the end of the 10^th year following the original account holder’s death.

And yet, as of today (October 28^th, 2022), the IRS has indicated they will not finalize the above changes to the rules governing the SECURE Act’s impact on retirement account holders and beneficiaries until sometime in 2023.

So, with the IRS’s SECURE Act RMD regulations still not finalized, what should you do?

Not only should you err on the side of caution and meet with your accountant and your advisor, but you should stay in close contact with both. That way, you’ll be aware of when the IRS regulations interpreting the SECURE Act have been finalized, and that will enable you to make the best short- and long-term financial decisions for you and your family.

Advisory services offered through Allworth Financial, a Registered Investment Advisor | Disclosures | Privacy Policy

Securities offered through AW Securities, a Registered Broker/Dealer, member FINRA/SIPC. Check the background of this firm on FINRA's BrokerCheck.

HMRN Insurance Agency, LLC license #0D34087

¹Barron’s 2024 Top 100 RIA Firms. Barron's© magazine is a trademark of Dow Jones L.P. The ranking of independent advisory companies is based on assets managed by the firms, growth, technology spending, succession planning, and other metrics.

² Retention Rate Source: Allworth Internal Data, FY 2022

³ The NBRI Circle of Excellence Award is bestowed upon NBRI clients meeting one or both of the following criteria: Total Company score at or above the 75th percentile of the NBRI ClearPath Benchmarking Database and/or improvement of five (5) or more benchmarking percentiles in Total Company score over the previous survey.

⁴ As of 7/1/2024, Allworth Financial, an SEC registered investment adviser and AW Securities, a registered broker/dealer have approximately $22.5 billion in total assets under management and administration.

⁵ InvestmentNews 2020 and 2021 Best Places to Work for Financial Advisers. The ranking reflects survey responses and scores completed by both employers and employees. Employers report their organization’s workplace policies, practices, and demographics. Employees complete a survey designed to measure the employee experience.

⁶ 2021 Value of an Advisor Study / Russel Investments

⁷ Ranked 9th Top Wealth Managers By Growth in Assets in the U.S. from RIA Channel, 2022. RIA Database and RIA Channel are registered trademarks owned by Labworks, LLC.

⁸USA Today Best Financial Advisory Firms 2024. The ranking is based on the growth of the companies’ assets under management (AUM) over the short and long term and the number of recommendations they received from clients and peers.

⁹NBRI Best in Class Ethics 2023. The Best in Class level is bestowed upon clients performing at or above 90 percentile of the NBRI ClearPath Benchmarking Database.

^✢ Scott Hanson, Investment Advisor 2005, 25 most influential people in the financial services industry. The ranking reflects 25 people who Investment Advisor magazine believes have had or will have the greatest influence on the financial services industry.

^✼Pat McClain, InvestmentNews 2014, Invest in Others Community Service Award, presented to an advisor who has made an outstanding impact on a community through managerial contributions to a non-profit organization.

^†Financial Times, FT 300 Top Registered Investment Advisers, June 2019. The ranking reflects six areas of consideration including the company's years in existence, industry certifications of key employees, AUM, asset growth, SEC compliance record and online accessibility and calculates a numeric score for each company.

Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design) and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.