As the end of the year approaches, now is a good time to review the updated rules regarding withdrawals from your pension plans. The SECURE law, which entered into force in 2020, made changes to the rules for minimum distribution required (RMD). It is important for us to review these rules in order to meet the requirements and prevent Uncle Sam from becoming the biggest beneficiary of your retirement savings.
Who should take Minimum distribution?
Anyone who has a retirement account (or an inherited retirement account) must receive distributions at some point. Before the SECURE (Setting Every Community Up for Retirement Enhancement) law was passed, the age to start the minimum required distributions was 70 years old. little time longer. It also allows them to delay paying tax on withdrawals, assuming they don’t need that retirement income until they turn 72.
You must start receiving distributions from traditional IRAs (individual retirement accounts) and other qualified plans (such as a traditional 401k) by April 1 of the year following the year in which you reach your retirement age. 72 years old, and before December 31 of the following years.
Traditional accounts are those that defer your contributions from income tax (depending on whether you qualify) and the funds grow tax-sheltered when invested in the account. Upon withdrawal, however, the tax-deductible portions of your contribution and any income will be taxable as ordinary income.
These plans differ from Roth IRAs and retirement accounts, where contributions come in after being taxed and withdrawals are tax-free. There are also no minimum distributions required on Roth accounts prior to the death of the owner, so your money can continue to grow tax-free over time, even after you reach retirement age. 72 years old. (However, note that employer sponsored Roth accounts to do have minimum distributions required).
How minimum required Distribution work
The amount of withdrawals you need to make is based on an IRS formula that takes into account certain factors including the account balance, your age, and your expected life expectancy.
For example, to determine your required minimum annual withdrawal, you would divide the balance from the previous December 31st in the IRA and / or the retirement plan by your life expectancy which is set by the IRS in IRS publication 590-B, Distributions from Individual Retirement Dispositions. Publication 590-B can be accessed by going to irs.gov/publications/p590b.
Because of this IRS formula, the amount of your distribution will not necessarily be the same every year. In addition, the life expectancy table you use can be based on different situations, depending on your particular goals and whether you plan to be the sole beneficiary of the funds in the account or instead plan to leave the remaining funds. to a beneficiary.
These IRS life expectancy tables include the following options:
Joint and Last Survivor Table – This table is used if the only beneficiary of the account is your spouse and they are more than 10 years younger than you.
Uniform Lifespan Table – This table is used if your spouse is not your sole beneficiary or is not more than 10 years younger.
Single Life Expectancy Table – Use this table if you are the beneficiary of an Inherited IRA.
It is essential that you follow the rules of the RMD and that you withdraw your required distribution before the deadline each year. Failure to do so or withdrawing less than the total amount required may result in a penalty of 50% of the amount required which is not withdrawn.
Because there can be so many “moving parts” when it comes to minimum required distributions, it is recommended that you first discuss your situation with a financial professional before accessing funds from the lender. ‘IRA or pension plan.
Withdrawals from a legacy account
If you are the beneficiary of a traditional IRA account and / or a retirement plan, the withdrawal rules may differ depending on whether or not you are the spouse of the deceased. For example, if you inherit a Traditional IRA from your spouse, you usually have several choices: treat it as your own by “pumping” the money into your own current IRA, or keeping the money in a beneficiary IRA.
For beneficiaries other than the spouse, however, the distribution rules now require that all funds be withdrawn from the account within ten years. If you are not required to take out a certain amount on an annual basis, at the end of the ten year period, the inherited account must be fully depleted.
This differs from the previous rules regarding inherited IRA and pension plan withdrawals. Prior to the SECURE Act, beneficiaries were allowed to stagger withdrawals and, in turn, space out taxes owed each year.
Additionally, beneficiaries other than the spouse are not allowed to treat an inherited IRA as their own. This means that no direct contribution can be made to the account, nor that funds can be transferred to the IRA from other accounts. (You can, however, make a trustee-to-trustee transfer, as long as the IRA receiving the funds is set up and maintained in the name of the deceased owner of the IRA for your benefit as the beneficiary.)
Take the next step with distributions
Everyone’s financial, retirement and inheritance goals, as well as their risk tolerance and time frames, are all different. So while there are definite IRS rules dictating what you can and cannot do with IRAs and retirement accounts, there is no one strategy that is right for all investors and retirees at all. levels. Thanks to the SECURE Act, unmarried LGBTQ people who have partners should weigh the benefits of transferring their own IRA to a spouse’s account.
With this in mind, it is best to discuss your particular situation, as well as your short and long term goals, with a finance professional familiar with LGBTQ financial planning to help you design the plan and plan. timeline that works for you.
This article appears in the December 2021 issue of OutSmart magazine.