For those of you who take distributions from retirement plans, including “qualified” plans and IRAs, you may be able to slow down withdrawals beginning
in 2021. This is the result of recently issued proposed regulations that update life expectancy tables used to determine required minimum distributions.
Assets held in retirement plans can grow tax free. This tax break creates an incentive to leave funds in the account as long as is practical given the individual’s financial needs.
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To ensure that retirement plans are used for retirement, the law requires the account owner to begin taking distributions for the year in which he or she turns age 70½. This may be extended for qualified plan assets if the owner continues to work.
But generally speaking, the first distribution must be taken by April 1 of the calendar year after the account owner turns 70½. If the first year distribution is delayed until April 1 of the next year, then two distributions must be taken in that next year.
The law requires that distributions be designed to exhaust the retirement funds by the day that the account owner has exhausted his life expectancy. Some will outlive this expected date and others will not.
As people live longer, the tables used to determine minimum distributions need to be adjusted. The proposed regulations adjust the tables to what is forecasted to be life expectancies in 2021.
Because the new life expectancies are longer than the current ones, the RMDs will decrease for the 2021 calendar year and beyond. If someone turns 70½ in 2020 and opts to defer the 2020 distribution until April 1, 2021, the existing table lives will be used for that 2020 distribution.
The new rules will benefit only those people who have the financial wherewithal to defer taking retirement plan distributions other than what they are forced to take. The IRS reports that this is 20.5% of all people taking retirement distributions.
For any assets held in a Roth account, the new regulations change nothing. Roth accounts are not subject to RMDs for the account owner, so there is no change to be made.
Proposed regulations are invitations to comment and these rules may be tweaked, but probably only tweaked. Commentators may ask for clarification, but the new life expectancy tables will not be changed.
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Q: I have a Roth IRA and in 2019 I took an $8,000 distribution. I am 64 years old. This account has been in existence since 2012 so it is my belief that I have no taxable income from the distribution. The account balance is now $21,822 and my original investment was $6,000 ($2,000 per year for three years). I know there is a rule about taking your investment out first, but since this is a Roth it seems it no longer matters what I am taking because I passed the beginning distribution age of 59 ½ . Does this mean that I do not report anything on my 2019 tax return?
You are going to get a form 1099-R to report the distribution. This will require that the $8,000 show up on your tax return but, as you say, not as taxable income.
If you look at the first page of a 2019 Form 1040 there is a line 4 for IRA distributions. The $8,000 you received will end up on line 4a. This line is not the taxable one — that is line 4b. Nothing will be shown on line 4b.
IRS will then be able to match your line 4a reporting to the 1099-R form. Certain Roth distributions must also be reported on a Form 8606. The Form 8606 determines how much of the distribution is qualified and how much is nonqualified — for both income reporting and perhaps an early withdrawal penalty.
Because you are past age 59½ you will not need to report anything on Form 8606. Line 4a is the only place that your distribution will be reported.
If you, or your tax return preparer, use computer software to prepare the return, you just need to make sure that the distribution is properly entered in the software to carry to the right place on the return.
James R. Hamill is the Director of Tax Practice at Reynolds, Hix & Co. in Albuquerque. He can be reached at [email protected].
