New IRS Rule Affects Required Minimum Distributions

The government knows Americans live longer than they did a decade ago, which will be reflected in the required withdrawal amounts from retirement funds at various ages beginning in 2022. The new figures result from revised IRS algorithms for calculating required minimum distributions. RMDs are the sums — estimated as a percentage of account size — that you are required to withdraw yearly from your 401(k), 403(b), or individual retirement plan (IRA) beginning in your early seventies. As a result, your RMDs, which are taxed as ordinary income if taken from conventional accounts, will be lower than under the previous formula.

In addition to two previous RMD modifications in recent years, the new data further complicate an already intricate topic of what you need to know about RMDs and some effective tactics for maximizing retirement account regulations. IRA specialist Ed Slott advises that this is a challenging year to calculate RMDs correctly. First, RMDs are reinstated after being suspended for the 2020 calendar year. And the IRS imposes severe fines for failing to withdraw the yearly minimum, so don’t forget. You are not required to withdraw from Roth IRAs, but you must withdraw from a Roth 401(k) traditional IRA and 403(b).

Additionally, there is a birthday problem for certain account holders: The 2019 SECURE Act raised the RMD eligibility age from 70.5 to 72, but not for those already receiving RMDs in 2019. Therefore, if you reach 72 before July 1, 2021, you must withdraw your RMD by December 31, 2021 – your regularly scheduled withdrawal for 2021. If your 72nd birthday comes in the second half of 2021, you have until April 1, 2022, to make your first withdrawal, but you will still use the 2021 tables to determine the amount. ​

For 2022

Starting next year, many individuals’ RMDs will be around 6 to 7 percent smaller than they would have been under the previous IRS life expectancy estimates. For instance, a single 75-year-old woman whose IRA is worth $100,000 at the end of 2021 would be required to take a minimum of $4,065 in 2022, approximately $300 less than she would have been required to withdraw under the previous criteria.

However, the fact that you may remove less money annually does not imply that you should. Your retirement living expenses may exceed your RMD. If you retire before age 70 — far before you are required to take RMDs — you may wish to withdraw funds for living costs, so you may delay receiving Social Security and increase your monthly payments. Generally speaking, this is a sensible decision, according to Boston University economist Laurence J. Kotlikoff.

Save money on taxes; although the money is withdrawn from conventional IRAs, 401(k)s, and 403(b)s is regarded as regular taxable income, there are ways to mitigate the impact under current law. If you are at least 70.5 years old, you can give directly from your conventional IRA (but not these other funds) to a 501(c)(3) organization, such as a food bank or religious institution. Qualified charitable distributions (QCDs) can be used for any RMD you may owe. Still, the withdrawal is free from income taxes – even if, like most Americans, your charitable contributions are not itemized. IRA funds are usually the best funds to donate to charity, says Slott. You may also convert tax-deferred IRA funds to Roth IRA funds unless Congress modifies the present restrictions. You will incur taxes on the money you transfer from your traditional IRA to your Roth IRA, but the money will grow tax-free. You will not owe any additional taxes or be required to make RMDs when you take money from a Roth IRA.

You cannot utilize your RMD for a Roth conversion, but you can convert extra funds to a Roth any year after fulfilling your distribution requirement. The Roth account, if allowed to grow throughout your new, longer life expectancy, should provide tax-free income in the future. ​​