From the beginning of 2022, retirees will have better access to their tax-deferred retirement accounts because required minimum distributions (RMDs) are going down.
According to Yahoo, having updated its actuarial tables for the first time in 20 years, the Internal Revenue Service now determines how much a person must withdraw from their retirement account at age 72.
In addition to the longer lifespans projected in the new tables, RMDs calculated from individual retirement accounts, 401(k)s, and other retirement savings vehicles are also calculated.
Working with a financial advisor can help you with RMD planning and determining your retirement income needs.
How Do RMDs Get Calculated?
The primary benefit of retirement accounts is that they provide tax benefits.
Retirement savers are typically able to defer taxes on their investments until they withdraw the money.
Over time, the money will continue to grow at a faster rate as a result.
Taxes can be delayed for a limited period, though.
Once you reach a certain age, the IRS requires you to withdraw a certain amount from your retirement account each year.
Until the 2019 SECURE Act, you had to start taking withdrawals from your IRAs or employer-sponsored retirement plans at age 70.5.
However, the 2019 SECURE Act changed the age at which RMDs begin.
If you reached age 70.5 in 2019 the prior rule applied and you had to take your first RMD by April 1, 2020.
Now, after you reach 72, you are required to take your first RMD by April 1.
RMDs apply to the following accounts:
- Traditional IRAs
- SEP IRAs
- SIMPLE IRAs
- 401(k) plans
- 403(b) plans
- 457(b) plans
- Profit-sharing plans
- Other defined contribution plans
RMDs do not apply to Roth IRAs.
It is relatively easy to calculate your RMD.
Start by finding out how much your retirement account was worth as of December 31 from the previous year.
Once you have that figure, divide it by the distribution period that corresponds to the age indicated on the IRS Uniform Lifetime Table.
For instance, if a 72-year-old female retiree had $500,000 in her IRA, then the amount would be divided by her distribution period number, in this case, 27.4.
Her withdrawal requirement in 2022 would therefore be $18,248.
Retirees Can Benefit From The New RMD Formula
Retirement assets will have to be spread out over more years thanks to an increase in the average life expectancy by the IRS, from 82.4 to 84.6.
The result of this is that RMDs beginning in 2022 will be less than the formula in place previously, which has been in place since 2002.
Any retiree or anyone subject to required minimum distributions will be pleased by this news.
You can keep more of your retirement funds in IRAs, 401(k)s, and tax-deferred accounts by withdrawing less each year.
Your tax liability will be lower if you take smaller RMDs, and you will possibly fall into a lower tax bracket.
An individual age 72 with $500k in a 401(k) would have been required to withdraw $19,531 ($500,000/25.6) in the first year of taking RMDs under the previous Uniform Lifetime Table.
It would have been $1,283 more than what would have been taxed than the revised table, which requires a smaller minimum withdrawal amount.
As an example, under the old RMD formula, a 72-year-old with $2 million in retirement would need to withdraw $78,125.
This retiree, however, would keep an extra $5,133 growing tax-deferred in his retirement account by the updated formula, which will result in an initial RMD of $72,992 ($2 million/27.4).
Withdrawing Retirement Assets: Tips for Retirement Asset Withdrawal
- If you are planning for decumulation, a financial advisor can be a valuable resource. Fortunately, finding one doesn’t have to be difficult. SmartAsset’s free tool allows you to research and match up to three financial advisors in your area for free, and you can then meet with your advisor matches free of charge to decide which is right for you. If you’re looking to help reach these financial objectives, get started now.
- Retirement planning includes anticipating the expenses you’ll incur and how much you plan to spend. The Center on Retirement Research at Boston College found that the average retired household reduces spending by 1.5-1.6% per year following retirement. For retirees, household consumption declines by an average of 0.75-0.80% per year, reaching double digits in the 20th year of retirement. SmartAsset’s Budget Calculator enables you to monitor your monthly expenditures.