The changing dynamics of required minimum distributions

Helping clients navigate recent changes.

After working with your clients to accumulate money for retirement, at a certain point you must switch to helping them withdraw money. Some retirement arrangements require clients to start withdrawing money. The money accumulated in qualified (pre-tax) retirement savings plans may be subject to required minimum distributions – RMDs.

The rules around those plans are not all the same. The required distributions, beginning date, and exceptions vary. Financial professionals, along with tax professionals, may be able to help clients understand, prepare for, and comply with RMD requirements.

Those rules have changed recently.


RMD rules, requirements, and exceptions vary

The SECURE Act, which became law in 2019, moved the RMD age to 72.  In addition, the RMD tables were adjusted for 2022 to reflect increased longevity, and now have longer life expectancies for most ages.

This will not affect all people – for some, their annual IRA withdrawal is already more than the RMD requirement. However, those who are only taking the minimum distribution requirement may see less taxable income.

It’s important to know that the new RMD age of 72 and adjusted life expectancy tables may push more taxable income into the future. That could be helpful for some but others could ultimately move into higher tax brackets, paying for higher Medicare premiums and new or increased exposure to the Net Investment Income Tax.

Other tax issues could arise as well. The SECURE Act also modified the “stretch” provisions. The modifications can mean that children who inherit a large IRA may need to pay income taxes sooner on distributions from the IRA. The ability to “stretch” the IRA balance over a beneficiary’s life expectancy has been eliminated for many.

These recent changes might appear positive but could actually raise income taxes and leave the retiree with less in the end. All of this means it is more important for many people – not just the mega-rich – to have a tax-sensitive distribution strategy as they move into retirement.

Here are some things to keep in mind.

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RMD deadlines

Generally, the deadline for taking RMDs is December 31 each year.

Clients can delay their initial RMD with certain options, but this could affect their taxes and future RMDs later on. For example, if a client chooses to delay their first distribution in the initial RMD year, they will need to take two distributions in the following year.

Other exceptions may also apply. If a client’s qualified retirement plan allows, and they own less than 5% of a company, they may be able to defer their RMD until the year they retire. Certain RMD rules also apply if an individual inherits a qualified plan or an IRA, including a Roth IRA.

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Missing the RMD deadline

If a client misses the RMD deadline or fails to withdraw the proper amount, they may need to pay an excise tax to the IRS. That excise tax can be up to 50% of the RMD amount.

It is the client’s responsibility as the IRA owner to ensure the correct amount of their RMD is distributed. For living IRA owners, IRA providers are required to either provide an estimate of the RMD or an offer to calculate the RMD on their behalf. IRA providers may also consult with beneficiaries of IRAs to help them estimate or calculate the RMD on their behalf. This is an opportunity to reach out to your clients affected by RMDs before the end of the year.


Options for RMDs

Clients are required to take RMDs. It does not matter if they need the income or not. Clients have many ways to use those RMDs besides living expenses.

Looking into the future and creating a financial strategy can give clients an idea of what might be coming so they can address RMDs proactively rather than simply reacting to a difficult situation that is already upon them. Options for clients, depending on their financial situation and goals, could be a Roth IRA conversion, or leveraging the RMD to fund a life insurance policy, funding a donor-advised fund or a qualified charitable distribution if certain requirements are met. Living Roth IRA owners do not have to take RMDs.


Start the RMD conversation

RMDs can have different implications, depending on the client’s needs for day-to-day income. Financial professionals can be an important ally for clients who need to understand, prepare for, and comply with RMD requirements – particularly as things change.

For more information or ideas on how to talk to clients about RMD changes, email the Advanced Strategies and Planning Platform Team.

Purchasing an annuity within a retirement plan that provides tax deferral under sections of the Internal Revenue Code results in no additional tax benefit. An annuity should be used to fund a qualified plan based upon the annuity’s features other than tax deferral. All annuity features, risks, limitations, and costs should be considered prior to purchasing an annuity within a tax-qualified retirement plan.

This content is for general educational purposes only. It is not intended to provide fiduciary, tax, or legal advice and cannot be used to avoid tax penalties; nor is it intended to market, promote, or recommend any tax plan or arrangement. Allianz Life Insurance Company of North America, its affiliates, and their employees and representatives do not give legal or tax advice. Customers are encouraged to consult with their own legal, tax, and financial professionals for specific advice or product recommendations.