New RMDs Coming in 2022

Take-Away: Beginning in 2022 the IRS will begin using longer life expectancies to calculate required minimum distributions (RMDs.)With longer life expectancies, annual RMD amounts will drop between 0.3% to 0.5%.

Background: Lifetime RMDs which are taxed as ordinary income must be taken from an individual’s retirement account each year beginning in the year that the individual attains age 72 years.

– Excise Tax: The failure to take an RMD will result in the imposition of a 50% excise tax on the amount that should have been taken but was not taken by the individual. For those individuals who attained age 72, they have January through March of the following calendar year in which to take their first RMD and avoid the excise tax. Thereafter, the RMD must be taken by December 31 of the year in order to avoid the excise tax in each subsequent years. [IRC 401(a)(9)(C).]

Uniform Lifetime Table: Annual RMD amounts for individuals like IRA owners age 72 and older are calculated normally using the Uniform Lifetime Distribution Table.

– Exception- Spouse More than 10 Years Younger: The only exception when the Uniform Lifetime  Distribution Table is not used is when the individual age 72+ is married to someone who is at least 10 years younger. In that narrow situation, the individual’s RMD is determined using a table for lifetime distributions based on the joint life expectancy of the individual and someone  who is 10 years younger.

2022 New Table: A new Uniform Lifetime Distribution Table will be used beginning in 2022 to calculate RMD’s. It is projected that using the new Uniform Lifetime  Distribution Table an individual’s RMD amount will drop between 0.3% and 0.5%, which means that less ordinary income will be subject to taxation.

Comparison of  2021 and 2022 Uniform Lifetime Distribution Tables

Age.           2021.         2022.

72.            3.91%.      3.67%
73.            4.05%.     3.79%
74.           4.21%.      3.93%
75.           4.55%.      4.07%
76.           4.55%.     4.39%
77.            4.72%.     4.39%
78.            4.93%.     4.57%
79.            5.13%.      4.77%
80.            5.35%.     4.95%
81.             5.59%.     5.19%
82.             5.85%.     5.44%

The Uniform Lifetime Distribution Table runs up to age 109 years.

Example: Maud, age 80 years, has $500,000 in her IRA on December 31. In 2021 Maud must receive at least $26,750 in RMDs to avoid the 50% excise tax. If Maud attained age 80 in 2022, when the new Uniform Lifetime Distribution Table applies, her RMD for 2022 with an end-of-the-calendar-year IRA balance of $500,000 would be $24,750. Thus, with the new Uniform Lifetime Distribution Table, Maud’s RMD will be $2,000 less.

Inherited IRAs: We know that the SECURE Act permits the designated beneficiary of an inherited IRA to wait and take one lump sum distribution in the year in which the 10th anniversary of the IRA owner’s death occurred. Thus, the life expectancy of the designated beneficiary does not matter much when it comes to inherited IRAs.

– Eligible Designated Beneficiaries: However, for eligible designated beneficiaries, e.g. a surviving spouse, a minor child of the IRA owner, a disabled or chronically ill beneficiary, or a beneficiary who is less than 10 years younger than the IRA owner, those eligible designated beneficiaries may continue to use their own life expectancies to determine each year’s RMD from their inherited IRA. For that limited class of eligible designated beneficiaries, there is a one-time reset of their life expectancy assumptions in 2022 that will reduce the amount of the RMD that they would otherwise have to take in 2022. [Regulation 1.409(a)(9)-9(f)(2)(ii)(B).]

Conclusion: The upshot is that most individuals will experience a reduced taxable RMD amount of what they would have had to take under the prior Uniform Distribution Table beginning in 2022. For those who wish to avoid paying ordinary income taxes on their RMD amount, this is good news.