Last Updated November 24, 2022
For required minimum distributions (RMDs) beginning January 1, 2022 and after, the IRS on Nov. 6 issued final regulations that update the life expectancy and distribution period tables used for purposes of determining required minimum distributions (RMDs) from IRAs and qualified plans such as solo 401k plans. The main takeaway is that in 2022 and later years retirement account holders will not have to empty out their retirement accounts as rapidly since their life expectancy has been increased.
This IRS update for life expectancy and distribution period tables will impact IRA owners including IRA LLC holders, solo 401k plan participants, beneficiaries, and trustees.
The reason for these updates is to reflect the longer life expectancies of Americans, and to align the life expectancy tables with the mortality tables.
While the 2021 RMDs will be calculated under the current tables, the 2022 RMDs and later years will be less as a result of the updated life expectancy tables. This is good new for solo 401k participants and IRA holders as they will be able to put more retirement funds to work for them since pretax retirement funds grow on a tax deferred basis as long as they remain in the account.
ILLUSTRATION of the New Year 2022 RMD Tables:
John reaches age 75 on April 15, 2022, and his solo 401k had a fair market value (FMV) of $250,000 as of December 31, 2021. Under the new Uniform Life Table, his life expectancy is 24.6 so his RMD amount is $250,000/24.6 = $10,162.60. Under the old Uniform Life Table, John’s life expectancy is 22.9 resulting in a higher RMD amount of $250,000/22.9 = $10,917.00.
The RMD Rules Apply to the Following Retirement Plan Types
- traditional IRAs
- SEP IRAs
- SIMPLE IRAs
- 401(k) plans including solo 401(k) plans
- 403(b) plans
- 457(b) plans
- profit sharing plans
- other defined contribution plans
Calculating the Required Minimum Distribution
The required minimum distribution for any year is the account balance as of the end of the immediately preceding calendar year divided by a distribution period from the IRS’s “Uniform Lifetime Table.” A separate table is used if the sole beneficiary is the owner’s spouse who is ten or more years younger than the owner.
There are 2 (two) Life Expectancy Tables for Calculating Solo 401k Required Minimum Distributions
Beginning Date for Your First Solo 401k RMD
April 1 following the later of the calendar year in which the solo 401k participant reaches age 72 (age 70 1/2 if born before July 1, 1949).
Beginning Date for Your First IRA (Including SEPs and SIMPLE IRAs) RMD
- April 1 of the year following the calendar year in which you reach age 70½, if you were born before July 1, 1949.
- April 1 of the year following the calendar year in which you reach age 72, if you were born after Jun 30, 1949.
Date that you turn 70½ (72 if you reach the age of 70 ½ after December 31, 2019)
You reach age 70½ on the date that is 6 calendar months after your 70th birthday.
Example: Your 70th birthday was June 30, 2018. You reached age 70½ on December 30, 2018. You must take your first Solo 401k RMD (for 2018) by April 1, 2019. You will take subsequent Solo 401k RMDs on December 31st annually thereafter, as will be discussed below.
Example: Your 70th birthday was July 1, 2019. You reach age 70½ after December 31, 2019, so you are not required to take a solo 401k minimum distribution until you reach 72. You reached age 72 on July 1, 2021. You must take your first solo 401k RMD (for 2021) by April 1, 2022, with subsequent RMDs on December 31st annually thereafter.
When do Solo 401k RMDs Commence?
Generally RMDs are required to be distributed December 31. However, you can delay taking your first RMD until April 1 of the year following the years our turn 72. However, if you wait to take your first solo 401k RMD until April 1, this will result in having to take 2 (two) RMDs that year–the first one in April, and the second one by December 31 of that same year. This can be problematic as it could bump you into a higher income tax bracket since solo 401k RMDs are taxed at earned income tax rates.
What Happens if I Miss My Solo 401k RMD?
The IRS penalty for not taking a solo 401k RMD on time, or for taking less than the required amount, is hefty: 50% of the amount not taken by the deadline.
