South Florida Sun-Sentinel (Sunday)
Making sense of RMD regulations
Q: I inherited an IRA in January
2021. Am I required to make an RMD in 2021?
A: No. The IRS has indicated that, according to the SECURE Act of 2019, IRAs inherited in 2021 and later are not subject to immediate required minimum distributions (RMDs).
There was some confusion because an IRS statement issued in 2021 seemed to imply that RMDs would be required.
You will not be required to take any distributions for years one through nine after your inheritance. See IRS Publication 590-B. However, by the end of the
10th year after inheriting the IRA, all of the funds must be withdrawn. It may be to your advantage to take gradual distributions throughout the entire period in order to avoid a large IRS liability in the final year, especially if you expect that final distribution will put you in a higher marginal tax bracket.
Q: I will turn 72 in 2023. When will I be required to take RMDs?
A: After this year, for anyone who turns
72, the first required RMD will be by April
1 of the following year. So, in your case, the first RMD will be April 1, 2024. Your IRA custodian should be able to tell you the amount of the RMD. However, if you select the option of postponing the first RMD to 2024, you will have to take two RMDs in 2024; the second one will have to be taken by the end of 2024. The second RMD will be based on your IRA balance at the end of 2023. In order to avoid two RMDs in one year, you can take the first RMD in 2023.
Q: I divorced my wife recently. The marriage lasted more than 10 years. She is several years younger than I am. I am close to 62 and expect to file for my benefits when I reach 62. My ex earned more than I did. When can I file for spousal benefits based on her work record? Am I only eligible for spousal benefits if she applies for a Social Security benefit herself ?
A: As long as the divorce has been in place for two years, you are eligible for spousal benefits based on her work record even if she has not filed for her benefit. However, the spousal benefit will be no more than 50% of her work benefit. You would be entitled to a spousal benefit only if 50% of her benefit exceed the amount of the benefit you are entitled to for your own work record. You are not entitled to both benefits — only the benefit which is greater.
Q: I am a conservative investor. I have been depending on income from CDs, but I’m not happy about the low returns. Are there other options you can recommend that provide more income but are not risky?
A: Another option that makes sense without any more risk than a CD is a fixed-rate annuity. It is referred to in the industry as a multiyear rate guaranteed annuity, or MYGA. The main distinction is that with CDs, you pay taxes annually on the interest earned. With MYGAs, you defer the taxes until money is taken out. The interest rate compounds in a tax-deferred manner, which is important to consider when you compare products. MYGAs make sense if your time horizon is two years or more. If your time horizon is less than two years, you should consider CDs or money market funds. For two-year or longer maturities, the interest rate is generally higher for MYGAs.
If you want to incur more risk, you could consider an indexed mutual fund or ETF that invests only in companies with a history of increasing dividends. However, unless you are a long-term investor, I wouldn’t recommend this alternative since it does involve more risk than a CD. There is no government guarantee that your initial investment will not decrease in value, as is the case with a CD or MYGA.