New RMD Calculations

Michelle Barron |

Good news! Less forced taxation. 

Many of you know that once you hit the golden RMD (Required Minimum Distribution) age, the US Government generally mandates that you start taking a minimum amount from your taxable retirement accounts. The fact is they want to begin collecting taxes on the funds you have been deferring for years. The mandate requires the previous years ending balance divided by the IRS’s published average life expectancy to calculate the minimum distribution. 

The current life expectancy tables published in 2002 reflect outdated demographics and require larger RMDs. The recent updates now reflect that Americans live longer and stretch the mandates over a longer average life span. You may remember before 2020; the golden age was once 70 1/2. In December of 2019, the SECURE Act ushered in the first change updating the age requirement to 72. On November 6th, the IRS released another update and changed the various life expectancy tables reflecting a longer average life span. Both updates will generate smaller overall mandated distributions over your lifetime.

Since these tables are released so late in the year, the IRS delayed implementation for another year. They will not be in effect until 2022 to give custodians and recordkeepers enough time to implement them. Remember, the Cares Act deleted the 2020 RMD mandate. 2021 will resort to a minimum age of 72 with the 2002 lifetime tables and the update tables, requiring a smaller distribution to follow in 2022.

In any event, as long as you don’t need the RMD funds to cover your current living expenses, a smaller RMD means fewer taxes and more retirement savings you can retain for tax-deferred growth. Don’t worry; if you need funds over and above your RMD, you can always take more than the required minimum. 

While all of the changes can be confusing, don’t forget to meet your obligations. Failing to take your full RMD can result in a stiff penalty equal to 50% of the amount not taken plus ordinary income taxes. Taxes and penalties will add up quickly and reduce your net distribution. Assume you are in the 24% tax bracket and forget to take your RMD. Be prepared to kiss 74% of your distribution goodbye. 

How will these changes affect you?  

Let’s take a look at an example. 

An IRA owner who will be 72 in 2022 will be required to take the first forced distribution. A special provision is allowed during the first year and extends the year-end deadline to April 1st of the following year. As a note of caution, waiting until the next year to take the first distribution will require two RMDs in the same year. One for the year you turned 72, and then an additional RMD for 73. Let’s assume your IRA is worth $500,00 as of December 31st, 2021. 

Under the old lifetime table, the previous year-end value would be divided by 25.6, and the 2022 RMD value would have been $19,531.25. ($500,000/25.6). Under the new table, the life expectancy factor is 27.4, and the RMD value is $18,248.17. ($500,000/27.4). That’s about a 6.5% drop.

Any of the rules surrounding IRS regulations are complex. As multiple changes occur in a short time, it becomes even more confusing. Here is a quick recap of the RMD changes since 2019.

  • 2019- The Secure Act updates the mandate from age 70 ½ to 72.
  • 2020- The COVID pandemic and resulting CARES Act waives all 2020 RMD requirements
  • 2022- New IRA life expectancy tables will take effect for RMD calculations reducing mandates.

If you are unsure how any of the new regulations will impact you, your retirement accounts, or potential financial planning strategies that will help you plan accordingly, contact our office. That’s our niche and we are happy to review your situation and provide you with guidance. 

This material is provided as a courtesy and for educational purposes only.  Please consult your investment professional, legal or tax advisor for specific information pertaining to your situation. Advisory Services Network, LLC does not provide tax advice.  The tax information contained herein is general and is not exhaustive by nature.  Federal and state laws are complex and constantly changing.  You should always consult your own legal or tax professional for information concerning your individual situation.