RMDs are governed by the IRS.
The process of levying and collecting taxes involves many people.
The IRS is tasked with overseeing the proper payment of these taxes.
According to a recent AARP article titled “How an IRS Rule Update Impacts Required Minimum Distributions,” the IRS also adjusts formulas used for required minimum distributions (RMDs) from retirement accounts.
The formulas for 401(k)s, 403(b)s, and tradition IRAs have been updated for 2022.
Although Roth IRAs are not subject to RMDs, Roth 401(k)s are subject to these updates.
What do these updates mean?
The required minimum distributions for 2022 will require less to be withdrawn from the accounts.
In recent years, adjustments to the RMDs has been fairly frequent and complex.
With the shutdown in 2020, the IRS suspended all required minimum distributions.
Just a year earlier in 2019, the age to begin RMDs was changed to 72 from 70½.
If someone had already started taking required minimum distributions in 2019, they had to continue taking the scheduled withdrawals.
What happens if you turned 72 in 2021?
This depends on when your birthday falls.
If your birthday is in the first half of the year before July 1, you should have taken your required minimum distribution before the end of 2021.
If your birthday falls on or between July 1 and December 31, RMDs must be taken prior to April 1, 2022.
These required minimum distributions will be based on the 2021 IRS calculation tables.
The new 2022 formula allows taxpayers to take around six or seven percent less in required minimum distributions under the IRS life expectancy tables.
Despite this fact, some taxpayers will need to take more from their accounts just to meet their daily living expenses.
Taking more than RMDs require does not trigger a penalty, but it does lead to paying correspondingly more income taxes.
Those who retire before age 70 may still desire to take distributions from tax-deferred accounts.
To delay taking Social Security benefits and thereby allow for a greater monthly Social Security payment.
Having this additional monthly income is beneficial for those who live into their 80s and 90s.
Could that be you?
Consider your own health and review the lifespans of your ancestors.
Remember: you cannot fool the gene pool.
Although paying taxes on RMDs can be frustrating, there are ways to minimize the tax impact.
Those older than age 70½ can make Qualified Charitable Distributions to registered 501(c)(3) charities from their IRAs and have them counted toward required minimum distributions.
The amount is exempt from income taxes when taking a “standard” rather than an “itemized” deduction.
If you would rather make tax payments in a year with lower income than you anticipate in retirement, then consider working with your financial advisor to convert traditional IRA assets to a Roth IRA.
Discussing these changes with your financial advisor could be a wise move at the start of the new year.
Reference: AARP (Dec. 8, 2021) “How an IRS Rule Update Impacts Required Minimum Distributions”