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Investment prices are lower than they were last Dec. 31…
And that raises concerns for many people who must take required minimum distributions (RMDs) from qualified retirement accounts, such as IRAs and 401(k)s.
After age 72, annual RMDs are mandatory from traditional IRAs and most employer retirement plans.
RMDs for the year are based on the value of an account as of Dec. 31 of the previous year. Now, many accounts have lower values than they did at the end of last year.
It doesn’t matter. You’re forced to make RMDs based on last year’s value no matter how much the account’s value has declined.
There’s no plan in Congress to delay or suspend RMDs in 2022. That’s been done twice, in 2009 and 2020.
In each case, there was a very significant decline in stock indexes due to factors outside the markets (the financial crisis and the COVID-19 pandemic).
This year, we have a normal stock price decline resulting from changes in monetary policy. Don’t count on a suspension of RMDs for 2022, so be sure to distribute at least the full amount of the RMD by Dec. 31.
The IRS realized a few years ago that many people weren’t taking RMDs or were calculating them incorrectly.
So, the IRS stepped up its tracking and enforcement of RMDs. Fortunately, you can take actions that might limit the negative impact of RMDs this year and in the future.
RMDs are a simple concept, but Congress and the IRS created rules that provide both opportunities and pitfalls.
Remember, Roth IRA owners don’t have to take RMDs. In this article, I address only RMDs for owners of traditional IRAs, not for beneficiaries who inherited retirement accounts. Beneficiaries face different rules.
Here’s the simple part. To compute your RMD for 2022, take the December 31, 2021, account balance for each traditional IRA.
Then go to IRS Publication 590-B, available free on the IRS website, www.irs.gov. In the back of the publication are the life expectancy tables.
Most people use Table III; married people whose spouses are more than 10 years younger than they are use Table II.
Beneficiaries use Table I. Look up the life expectancy factor for your age in the appropriate table. Divide the IRA value by the life expectancy factor. The result is your RMD for this year.
You perform this exercise every year. Here are some key points and strategies to consider when planning your RMDs.
The law allows you to combine or split IRAs without tax consequences.
It’s best to make any changes with direct trustee-to-trustee rollovers instead of trying to transfer the money yourself.
There can be good reasons to have multiple IRAs. When there is more than one beneficiary, some people want to maintain a separate IRA for each beneficiary.
Sure, the beneficiaries could inherit one IRA jointly and split it tax-free after inheriting. But they decide to act now.
While managing multiple IRAs can make life more difficult for you, another potential disadvantage is the investment returns and distributions from the IRAs might be different.
So the beneficiaries might not inherit the same amount unless you move funds around to equalize the IRA values.
Some people have multiple IRAs to segregate assets.
For example, you can buy a qualified longevity annuity contract (QLAC) in an IRA, and RMDs aren’t required from that portion of the IRA until age 85 or income is paid from the QLAC.
Your life might be simpler if you establish a separate IRA that holds only the QLAC. Also, an IRA that was created by a rollover from a 401(k) might have greater creditor protection than other IRAs under state law.
You might want to continue to keep that IRA separate.
Which accounts to draw down?
When you have multiple IRAs, after computing the RMD for each IRA, you can add them into one aggregate RMD amount. You can withdraw the aggregate RMD from the IRAs in any proportion you want.
The aggregate RMD can be taken from one IRA, or roughly equal amounts can be pulled from each IRA. Or you can take the aggregate amount from the IRAs in any ratio you want.
The only requirement is that by Dec. 31 the total distributions from your traditional IRAs are at least equal to your aggregate RMD for the year. Balances of inherited IRAs and any employer plans, such as 401(k)s, can’t be aggregated.
The RMDs for those other accounts are each computed and taken separately.
The exception is for inherited IRAs when they all were inherited from the same owner. How to take your distribution. Your RMD doesn’t have to be cash.
There’s no need to sell an asset to make the RMD.
You can take the RMD in property, known as an in-kind distribution. For most IRAs, this involves simply directing the custodian to transfer a certain number of shares of a mutual fund or stock from the IRA to a taxable account.
The value of the investment on the date of the distribution is counted as part of your RMD and is the tax basis of the asset when it’s in the taxable account. You must be sure the total value of the assets on the distribution dates at least equals your RMD.
The in-kind distribution is especially helpful when you own unconventional assets in an IRA, such as real estate, mortgages, or a small business. It is hard to break up such assets and sell only a portion of them to make the RMD.
Instead, make an in-kind RMD by transferring title of a portion of the asset to you.
Timing distributions: You can take the RMD at any time during the year.
Some people schedule monthly distributions because they like the regular cash flow.
Others take the full RMD early in the year to be sure the task is done.
Others wait until the end of the year. They want to maximize tax-deferred gains and income, and they want to delay paying estimated taxes on the distributions.
T. Rowe Price did a study some years ago comparing RMDs taken at the end of the year to those taken early in the year. It found that the IRA lasted longer when RMDs were delayed until late in the year.
But the study was done using a period when the stock indexes were steadily rising. The result would be different in a declining market or if the IRA had less invested in stocks. You must decide the timing strategy that is best for you.
Qualified charitable distributions.
In late 2015, Congress finally made permanent the qualified charitable distribution (QCD) exclusion. Each taxpayer age 70½ or older can have charitable contributions made directly from an IRA to a charity.
The charitable contribution is excluded from the taxpayer’s gross income, but it counts toward the RMD for the year.
The taxpayer receives no charitable contribution deduction. The limit on the exclusion is $100,000 per taxpayer per year. A married couple potentially can donate $200,000 this way, but each spouse must give $100,000 from his or her own IRAs.
If you’re making charitable contributions and taking RMDs, consider making the donations using a QCD. It usually is the best way for someone age 70½ or older to contribute to charity.
The first RMD must be taken by April 1 of the year after you turn age 72. The IRS calls that the required beginning date. If you turned 72 in June 2022, you have until April 1, 2023, to take that first RMD.
But it is considered your 2022 RMD, and you probably want to take it by December 31, 2022. Otherwise, in 2023 you must take that 2022 RMD, plus your 2023 RMD has to be taken by December 31, 2023.
That gives you two RMDs in one year and could push you into a higher tax bracket. (You use the December 31, 2021, account balances to calculate the 2022 RMD, even if you don’t take it until 2023.)