With the start of a new year and new rules on when you must take Required Minimum Distributions (RMDs) from Individual Retirement Accounts (IRAs), we will examine how this affects many of you and what you will decide to do. As always, if for any reason what we are about to cover worries you in any manner reach out to me or any fee-only Registered Financial Consultant. Now, on to the changes and how they may affect you and your IRAs.
Required Minimum Distributions
Under the old rules governing RMDs and Traditional IRAs, you had to start making your RMDs at age 70 ½ which has now been changed to age 72 for those who were not 70 ½ on December 31, 2019. Also, if you were already taking your RMDs, it is highly recommended that you continue to do so. Okay, now that we have gotten that clear we will look ay what you need to do when you reach age 72 and have Traditional IRAs.
Regardless of how many Traditional IRAs you have the IRS and government view them all as if they were a single IRA. That means you do not need to take from each IRA provided you take the RMD total as calculated from your total balance on December 31st of the previous year and use the longevity tables provided by the IRA found in Publication 590-B. To reach your RMD, simply divide your Traditional IRA total by the number found on the IRS table, and that is what must be taken from either one account or a combination of any of the accounts. The key here is to use the total of all your Traditional IRAs and the correct number from Publication 590-B.
And the new rules also affect the RMDs of inherited IRAs for people who are not spouses meaning if you leave a Traditional IRA to a child or other non-spouse individual, the rules for these RMDs have changed significantly for Traditional IRAs inherited after January 1, 2020. Under the old rules, an IRA’s RMD was determined by the life expectancy of the person who inherited the IRA. That meant if you left an IRA to a child that was 25, they would have been able to take a much longer time to deplete the IRA as they would use the longevity table for a 25-year-old. This meant that the IRA could continue to grow for decades over the life of the beneficiary. Under the new non-spouse rules passed and effective January 1, 2020, you have a decade or ten years to deplete the IRA to zero without incurring a penalty. You may make smaller RMDs in years you have more taxable income and more in years when you see less but regardless, you have a maximum of ten years to deplete the IRA in its entirety.
Nondeductible Contributions
In the event you have a Traditional IRA that contains nondeductible contributions, there are specific rules that apply to how to handle them and the RMD. If you have several Traditional IRAs and one is a nondeductible IRA part of your RMD will be determined to have come from that IRA regardless of where the RMD came from. These get tricky and require very specific paperwork that must be maintained to know what amount will be determined to have come from what type of account.
For the sake of simplicity, we will assume that you have a million dollars in your Traditional IRAs, and your RMD is $20,000 and one of the Traditional IRAs is a nondeductible contribution IRA with $50,000 in it or 5%. That means that $1,000 of the $20,000 will be determined to have come from a nondeductible IRA, causing that $1,000 to be tax-free while the other $19,000 is taxed as ordinary income.
ROTH Conversions
As I am hoping you are aware, we have been discussing Traditional IRAs and not ROTH IRAs as they do not have RMDs for the original owners. But with the same example from above, you have a nondeductible IRA and you wish to convert your RMD to a ROTH IRA you will have the same 5% converted as a tax-free portion the same as if you had taken the funds. So, if you converted funds from one Traditional IRA but have a nondeductible one, the IRS treats all of the IRAs as a single one and does not differentiate where the funds came from.
60-Day Rollovers
A while back, the rule surrounding rollover IRAs was altered to allow for a single conversion in a 12-month period regardless of if it is a Traditional or ROTH IRA. So, if you have multiple IRA and do a rollover, you are limited to a single one period. That means if you have a Traditional IRA and request a check to roll it over to a different brokerage house, you cannot request another check for a separate rollover for an entire calendar year of that request will be treated as a distribution regardless if you deposit within the 60-day period.
A way around this rule is to request one brokerage or holding company to send the funds directly to the new company and not to you in check form. By doing this, you may roll over an IRA as many times as you wish in a twelve-month period and are not limited to the single request. This is because the funds are never sent to you or have any taxes withheld from the originating firm.
Many aspects of an IRA have stayed the same from last year, with the two major exceptions being the age at which an RMD is required and the handling of an IRA for a beneficiary other than a spouse requiring no more than ten years to deplete the account.
If you have any questions on IRAs or concerns about how to properly account for them, please do not hesitate to reach out to me or any Registered Financial Consultant. And to join our email newsletter, fill out the form below.