The combined effect of several recent changes to tax laws have complicated 2021 required minimum distributions. The changes — the CARES Act waiver of required minimum distributions for 2020, the delayed effective date of new life expectancy tables and the SECURE Act increase in the starting age for taking RMDs to 72 — will make it challenging for individuals to keep track of the RMD rules over the next few years.
NEW RMD TABLES NOT EFFECTIVE UNTIL 2022
Back in November, the IRS released final regulations with new life expectancy tables to use to calculate RMDs from individual retirement accounts and company retirement savings plans. The new life expectancy tables will result in somewhat smaller RMDs. However, they cannot be used until 2022.
RMD RULES FOR 2021 AND 2022
The confusing result of the new laws (and subsequent IRS guidance) is that there are now different RMD rules for 2021 and 2022.
For 2020, RMDs were waived by the CARES Act. For 2021, RMDs will once again be due and will be calculated using the existing life expectancy tables.
RMDs for 2021 are calculated as if the 2020 waiver had not occurred. This means that no make-up 2020 RMDs are required for 2021. It also means that, in using the Single Life Expectancy Table, non-spouse beneficiaries will calculate their 2021 life expectancy factor by subtracting two years from their 2019 factor.
Example 1: Don is subject to RMDs from his SEP IRA. His 2020 RMD was waived by the CARES Act. In 2021, when he is 75, Don will be required to take an RMD based on a 22.9-year life expectancy factor from the current Uniform Lifetime Table.
If his SEP IRA was worth $300,000 on Dec. 31, 2020, the 2021 RMD will be $13,100 ($300,000/22.9). Don will not be required to make up the waived 2020 RMD.
Example 2: Abby inherited an IRA from her mother in 2017 at age 35. Abby was required to take her first RMD from the inherited IRA by Dec. 31, 2018. Since she turned age 36 in 2018, her 2018 RMD was calculated using 47.5 years, the life expectancy factor for a 36-year old under the existing Single Life Expectancy Table.
For each succeeding year, Abby must subtract 1 from the preceding year’s factor. So her 2019 RMD was based on a 46.5-year life expectancy factor. Abby’s 2020 RMD was waived. In 2021, Abby will subtract 2 years from the 2019 factor and use a 44.5-year factor (as if the 2020 RMD had not been waived).
For 2022, new life expectancy tables will apply. For lifetime RMDs, no adjustment in 2022 will be required to account for the fact that pre-2022 RMDs were calculated using the existing Uniform Lifetime Table.
However, non-spouse beneficiaries who inherited before Jan. 1, 2021, will be required to reset their 2022 RMD. These beneficiaries will not simply use the new Single Life Expectancy Table in 2022 at their age in 2022. Instead, they must look to the new Single Life Expectancy Table to determine what their life expectancy factor would have been for their first RMD under that table.
Then, they must subtract one year for each succeeding year to arrive at their 2022 life expectancy factor. Although the reset is more complicated than simply applying the new table, it does produce a smaller RMD.
AGE FOR STARTING RMDs CHANGED TO 72
Complicating things further, the SECURE Act increased the age for the first RMD from 70½ to 72 for IRA owners who reached age 70½ after 2019. This means the required beginning date, or RBD, for them is April 1 of the year following the year they turn age 72. However, workplace plan participants who do not own more than 5% of the company can use the “still-working exception” to defer RMDs until they retire — if the plan allows it.
One interesting quirk of this change is that it is impossible for anyone to have an RBD in 2021.
Why? An IRA owner who obtained age 70½ in 2020 falls under the SECURE Act rule allowing RMDs to be delayed until age 72. Thus, the earliest RBD would be April 1, 2022. Anyone who turned 70½ before 2020 would already be taking RMDs and would have an RBD of April 1, 2020, or earlier.
Additionally, because of the CARES Act RMD waiver for 2020, a plan participant taking advantage of the “still-working exception,” who would technically have an RBD in 2021 if she retired in 2020, won’t have a 2020 RMD, because it was waived, even if it wasn’t due until April 1, 2021. That means there will be no RBD in 2021, although the second RMD would be due by the end of 2021.
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As our second lead editor, Cindy Hamilton covers health, fitness and other wellness topics. She is also instrumental in making sure the content on the site is clear and accurate for our readers. Cindy received a BA and an MA from NYU.