The IRS’s New Rules for Your Retirement Distributions
As of the beginning of 2022, the IRS has updated its life expectancy tables, used to calculate Required Minimum Distributions (usually called “RMDs”) from 401(k)s, IRAs, annuities, and other employer sponsored retirement plans, for the first time in 20 years. While this may sound like a dry, technical adjustment only of interest to an actuary, it actually could have a significant impact on how you draw down your retirement funds.
After having remained static since 2002, the new life expectancy tables have taken a sizable jump forward. If you’re 55, for example, the IRS now expects you to live two full years longer than previously, with 31.6 years remaining rather than 29.6. That means that when you calculate how much of your retirement savings you’ll need to take as a distribution in any one year, you’ll be allowed to take less, so as to make your assets stretch out for a longer period of time.
Let’s say you’re a 75-year-old retiree who needs to calculate his RMD for an IRA with a balance of $100,000. Under the IRS’s old Uniform Lifetime Table, you would use a factor of 22.9 to calculate your RMD, which would be approximately $4,367 per year. Under the new Uniform Life Table, that factor has gone up to 24.6, which comes out to approximately $4,065 per year. Your new RMD has been reduced by roughly $300.
If you’re in a position where you don’t need to survive on the money in your retirement account, this can be a very good thing. If you’re a 75-year-old retiree and only taking your RMDs and no additional distributions, you can leave an additional $300 in your IRA every year. That money is able to earn additional interest and grow tax-deferred, helping to ensure that you don’t outlive your assets.
To calculate your RMD for any single year, look to the IRS Uniform Lifetime Table. Take the balance of your IRA or other retirement account, and divide it by the life expectancy factor that corresponds to your age. Keep in mind that you will need to recalculate your RMDs each year.
Remember, you must start taking your RMDs by April 1 of the year after you turn 72. All subsequent RMDs must be taken by December 31 and there is a 50% penalty imposed if you don’t take the full required distribution. You do have to pay ordinary income tax on all these distributions.
Even if you haven’t retired yet, it always pays to get out in front of these rules and plan for how you’ll implement them. The limitations can be a little tricky, but your Baird Financial Advisor team can help you navigate them and ensure that your retirement assets go as far as possible.
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