Article at a Glance:
- IRS Revises RMD Tables for 2022
- What happens if someone uses the 2002 tables for 2021 distributions? The answer is nothing
- What happens if someone uses the new final regulations effective for 2022 in 2021? This could be a problem
- Potential penalties on missed RMDs are lurking for many a careless senior
- SECURE Act expansion proposal would reduce the 50% penalty on missed RMDs
- The IRS has many guidance projects pending due to CARES and SECURE. Let’s hope we get answers before Christmas.
Some may have been surprised that IRS just finalized regulations that revise the Life Expectancy figures for Required Minimum Distributions. In 2001 IRS had explained that the tables were up-to-date and need not be adjusted. Shortly after that, Congress demanded that the tables be updated. When that happened in 2002, the IRS added a statement to the regulations [§1.409(a)-9, A-4] that the tables could be amended again. In 2018, the Trump Administration ordered all government agencies to go over their regulations and update as appropriate. In response, the IRS released new proposed rules on Nov. 8, 2019, with revised life expectancies that were supposed to go into effect on Jan. 1, 2021.
RMD WAITING GAME
We’ve been waiting to see if the regulations would be finalized, and the day has finally come – Nov. 12, 2020, with an effective date of Jan. 1, 2022. Due to CARES, no RMDs were required for 2020, but the calculations of those amounts were based on the 2002 regulations. Those regulations will also be used for 2021 RMDs.
What happens if someone uses the 2002 tables for 2021 distributions? The answer is nothing, because the individual would have taken out more than required for 2021 – there’s no problem with increasing your taxable income when it’s not needed.
What happens if someone uses the new final regulations effective for 2022 in 2021? This could be a problem; the distributions are smaller, which can lead to a shortage. Currently, such a deficit is subject to a 50% penalty. The IRS can waive the penalty and often does, but it’s preferable to do it right the first time. The penalty tax is an excise tax and has a lengthy statute of limitations. Retirement plan penalties are assessed on Form 5329. The statute doesn’t begin to run until that form is filed by a taxpayer.
RMD POTENTIAL PENALTIES
Potential penalties on missed RMDs are lurking for many a careless senior. Beneficiaries of IRAs have a greater risk. They also have RMDs and potential penalties, but there is no requirement for the custodian to calculate the RMD on an inherited IRA or communicate it to the beneficiary.
SECURE ACT EXPANSION
In Oct. 2020, a bipartisan Bill was introduced in the House Ways and Means committee to expand the SECURE Act. The proposal would reduce the 50% penalty on missed RMDs and allow the statute of limitations to run using the same date as the taxpayer’s Form 1040.
The notice reporting the final RMD regulations also indicated that IRS was working on revisions to the Sec. 401(a)(9) regulations in connection with law changes made by SECURE – the Act signed last December as part of the Budget Bill. The IRS also promised updated tables for individuals claiming Substantially Equal Periodic Payments to avoid the 10% penalty imposed by §72(t). The IRS has lots of guidance projects pending due to CARES and SECURE, and they all have a very short fuse. Let’s hope we get answers before Christmas.