Changes to Required Minimum Distributions

Key Points:

• The Required Minimum Distribution (“RMD”) amount decreased this year

• One time reset for inherited IRAs from 2019 or earlier

• Plan for multiple generations now

This year, we have already received several questions regarding the updated RMD table and distributions. So, I thought I’d answer two commonly confusing aspects of taking RMDs through this article.

RMDs are based off of the IRS Uniform Lifetime Table which identifies your life expectancy. They also tend to apply to all qualified retirement plans like IRAs, 401(k)s, 403(b)s, and 457 plans. To calculate your RMD, you typically take the previous year’s end balance for the qualified retirement account and divide it by the “distribution period” found on the IRS table.

As an example, someone turning 74 with a one-million-dollar IRA and distribution period of 25.5 results in a RMD of approx. $40,000 dollars in 2022.

The process of calculating RMDs is fairly straightforward, however the calculation becomes more complex when factoring in exact birthdate versus year of birth. For example, if you are born in the second half of the year (i.e. July – December), your 2022 RMD can be deferred to April 1, 2023. However, you would still be required to take the 2023 withdrawal by the end of the same year. Depending on your sources of income, deferring your RMD may you help avoid a significantly higher tax on other taxable income.

However, the biggest change for 2022, by far, is that the RMD amounts have decreased. The IRS issued new life expectancy tables which have individuals living 1-2 years longer than the older tables. You can really see this in the table starting at age 75 and going through age 85. Going back to the RMD calculation, a longer life expectancy results in a larger denominator and therefore a lower RMD. For example, if someone is 75 years old, the new denominator (distribution period) from the IRS table for the RMD calculation is 24.6 versus 22.9 in the old table. This change and resulting decrease in RMD can add up to several thousand fewer dollars in your overall annual RMD.

Depending on your situation, there are several ways to plan around these RMD changes. For most, lower RMDs may provide more flexibility in tax planning since tax brackets which are adjusted for inflation are increasing and lower RMDs provide more cushion until reaching the next tax bracket. This cushion may create an opportunity for other tax strategies.

In 2022, there is also an opportunity to reduce RMD requirements from inherited IRAs. This opportunity is specifically for IRAs inherited prior to 2020. The Secure Act eliminated the ability for most beneficiaries to stretch out an IRA if the account owner died in or after 2020. The new rules require a withdrawal of all assets in a qualified plan by Dec 31st of the 10th year following the account owner’s death. But for individuals that are beneficiaries of an inherited IRA from a family member who passed prior to 2020, you still can continue to stretch those distributions over your lifetime. And this year, you have a reset due to the new life expectancy tables. Note that the RMD calculations for inherited IRAs are different than the those for regular RMDs and that the inherited IRA RMD calculations use a single life expectancy table instead of a uniform life expectancy table (used in a regular RMD calculation).

On the new single life expectancy table, which is used for inherited IRAs, the age at which you started taking distributions will have a higher life expectancy value resulting in a higher denominator for the RMD calculation and thereby creating a drop in the RMD. For example:

Todd’s grandfather passed away in 2015, and he and his siblings all each inherited an IRA of $500,000. Todd (26yr.) took his first RMD in 2016 which totaled $500,000/57.2 = $8,750. Each subsequent year he subtracts 1 from his life expectancy to get his new inherited IRA RMD. In 2022 he will get a reset to the new tables, so he goes back to when he inherited the IRA at age 26 and uses the new factor from the new tables which is 59.2. Subtracting 6 for all the years he has already taken distributions gives him his new life expectancy factor which is 2 years more than his original life expectancy.

Bottom line is that the new tables are illustrating that individuals are living longer and to help make their money last a lifetime, their required minimum distribution amounts need to be less. In addition, if you have a qualifying inherited IRA, this is the year to get a reset on the life expectancy used to determine dollar amounts distributed. Although these tables show that people are living longer, that is not true across all age groups. Studies have shown that life expectancy for 40–50-year old people is actually decreasing. So, as these tables adjust, we also have to adjust what makes most sense for your specific situation over multiple generations. Remember: you can always take more than the RMD amount and do Roth conversions to benefit a spouse or children from future tax burdens. Most spouses will have a similar RMD and will be trapped by smaller tax brackets and the loss of one standard deduction so the same distribution will have a higher tax burden. We are here to help and can integrate financial planning and tax planning strategies around your RMDs. Contact us at info@clientfirstcap.com for more details.