During the past three years, the retirement industry has experienced unprecedented changes. For industry professionals, like those of us at First American Trust, it is a complex task to understand and digest all of these changes. For the consumer, we know it is even more challenging.
A Required Minimum Distribution (RMD) is the amount that must be withdrawn from employer-sponsored retirement plans, including Pension, Profit-Sharing, 401(k), 457(b), and TSP plans. RMD rules also apply to traditional IRAs and IRA-based plans such as SEPs, SARSEPs, and SIMPLEs.
These RMD rules have been around since 1974 when IRAs first began. IRAs were established as a way to save for retirement, which provided some people with a tax deduction for their contributions. Money would stay in the IRA, with earnings tax-deferred, until a specified age when distributions would be needed (and/or required) and would be taxable to the owner.
In 1986, changes were made to the rules, mainly for qualified retirement plans. These plans were put on the same timetable as IRAs, and the dates for which the first RMD payment is due was moved from December 31st of the year in which a person turned 70 ½ to the April 1st following the year in which he or she turned 70 ½. If a person waits “first year only” to take their RMD until April 1, they will be required to take two distributions in that year. This “first year only” rule remains in effect today. As note, Roth IRA owners do not have to take RMDs while they are alive.
These laws remained unchanged until 2019 when the SECURE (Setting Every Community Up for Retirement Enhancement) Act adjusted the initial RMD age from 70 ½ to 72. The first-year distribution delay, however, still remains in effect.
Since 2019, other changes have occurred including the CARES (Coronavirus Aid, Relief and Economic Security) Act, and the Consolidated Appropriates (SECURE Act 2.0) Act. Effective 1/1/2023, the beginning age for taking RMDs moved from 72 to 73, and effective 1/1/2033, it will be moved to age 75.
Because of confusion in the industry, including understanding of the rule changes, software programs that required updating, etc., the CARES Act provided a reprieve from taking RMDs in 2020.
To calculate an RMD payment, advisers use the IRA market value as of the prior December 31st and divide it by a factor, which is based on the owner’s age they will attain during the year of distribution. It's important to note that the December 31 market value for our clients is adjusted for income posted in early January for the prior year end, so it will not match your trust statement’s year-end value. Factors are pulled from IRS tables, which were updated in 2022 extending the amount of time until IRAs must be fully distributed due to people living longer lives.
If you have questions about IRAs or RMDs, please give me or your account relationship manager a call. We would love the opportunity to work with you!
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Denise C. Mehus, CRSP, CISP Senior Vice President, Manager of Retirement Plan Services First American Trust |
Denise brings more than 35 years of experience in the area of employee benefits to her role as Manager of the Retirement Plan Services group. Here she oversees the qualified and non-qualified retirement plan as well as the IRAs. A graduate of the Cannon Financial Institute, Denise holds the Certified Retirement Services Professional (CRSP) and Certified IRA Services Professional (CISP) designations. Denise has a deep understanding of employee benefit administrative that includes IRAs and regulatory issues.
The following article is for informational purposes only and is not and may not be construed as legal and/or investment advice. Investments contain risks, no third-party entity may rely upon anything contained herein when making legal and/or investment determinations regarding its practices, and such third party should consult with an attorney and/or an investment professional prior to embarking upon any specific course of action.
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