For the first time since 2012 the IRS has updated the life expectancy tables that serve as the basis for calculating the Required Minimum Distribution (RMD) for retirement accounts. The new tables reflect a longer life expectancy, and therefore have extended the distribution period which will lower the annual required minimum distribution. The actuarial calculations used to create the tables were done prior to Covid-19 which has, since the new tables came out, lowered the life expectancy by almost 2 years. These new lower annual RMDs will have a small but significant impact over time on the amounts retirees will need to take on an annual basis.
RMDs must be taken by age 72 if you were born after June 30, 1949, or the pre-SECURE Act age 70.5 if you were born before July 1, 1949. Those who reached 72 in 2021 will have their first RMD due by April 1, 2022, and will use the older RMD table. Any RMDs for the year 2022 will start using the new table and distribution period factors. For all subsequent years after your reach your RMD age, including the year in which you were paid the first RMD by April 1, you must take the RMD by December 31 of that year.
You can calculate your own RMDs by dividing your retirement account previous-year’s end value by the distribution period factor for your age that you will obtain for that given year. You would calculate your RMD for each eligible retirement account. For example, using the old table if you turned 72 in 2021, and had an account balance of $100,000 on 12/31/2020, you would use the old table to find that your distribution factor is 25.6 and your RMD for 2022 will be $3,906.25, and must be withdrawn from your account by April 1, 2022.
Using the new tables, if you turned or will turn 72 in 2022, and your account balance was $100,000 on 12/31/2021, you would use the new table to find that your distribution factor is 27.4 and your RMD for 2022 will be $3,649.64, and must be withdrawn from your account by April 1, 2023. The new RMD amount is $256.61 lower, a reduction of just over 6.5%.
The new lower RMD amounts will allow retirees to keep more of their retirement assets tax deferred, and allow for additional flexibility on taxation throughout retirement. The point of emphasis here is that RMDs are the minimum amount that must be withdrawn, the vast majority of retirees are expected to take more than their RMD amount every year. According to the IRS only about 1 out of 5 retirees are expected to take the exact RMD amount. Taking exactly the RMD amount would be advantageous to retirees that have supplemented their income through pensions or social security, and want to continue growing their nest egg. Taking less than the RMD amount would create a tax liability of 50% of the remaining RMD amount not taken by December 31st each year.
RMDs can be confusing with the transition into the new rules underway, and the penalty for not taking the RMD is quite severe. The RMD amount also has implications on your income and benefits. As always, it is important to consult a tax or investment professional before making these important decisions.