RMD Formula Changing for First Time in Decades

The IRS has good news for retirees starting in 2022: you can now keep more money in your tax-deferred retirement accounts thanks to lower required minimum distributions (RMDs).

For the first time in 20 years, the Internal Revenue Service has updated its actuarial tables that dictate how much a person is required to withdraw from his or her retirement accounts starting at age 72. The new tables, which now project longer lifespans, are used to calculate RMDs from individual retirement accounts, 401(k)s and other retirement savings vehicles each year. For help with planning out RMDs and meeting your retirement income needs, consider working with a financial advisor.

What Are RMDs and How Are They Calculated?

One of the primary benefits of retirement accounts are the tax advantages they provide. Traditional IRAs and 401(k)s allow retirement savers to defer taxes until they withdraw money from their accounts. This allows the money to continue to grow at a faster rate over time. However, you can only defer taxes for so long. To limit you from keeping your money in a retirement account indefinitely, the IRS requires you to withdraw a specific amount each year once you reach a certain age.

Previously, you were required to start taking withdrawals from your IRA or employer-sponsored retirement plan when you reached age 70.5. But the 2019 SECURE Act made a critical change to when 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. Yet if you reached age 70.5 in 2020 or later you must now take your first RMD by April 1 of the year after you reach 72.

People with the following accounts are subject to RMDs:

It’s important to remember that Roth IRAs are not subject to RMDs.

Calculating your RMD is relatively easy. First, look up the market value of your retirement account as of Dec. 31 from the previous year. Then, divide that value by the distribution period figure that corresponds with your age on the IRS Uniform Lifetime Table.

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For example, a 72-year-old retiree with $500,000 in her IRA would divide $500,000 by her distribution period figure, which is 27.4. As a result, she would be required to withdraw at least $18,248 from her IRA in 2022.

Why The New RMD Formula Is Good For Retirees

With the IRS raising the average life expectancy from 82.4 to 84.6, retirees will presumably need to spread their assets over more years. As a result, RMDs that begin in 2022 will be less than they were under the previous formula, which had been in place since 2002.

This is good news for retirees or anyone subject to RMDs. With smaller withdrawals required each year, more of your retirement assets can remain in an IRA, 401(k) or tax-deferred account. Smaller RMDs will lessen your tax liability and could potentially drop you into a lower tax bracket.

Under the previous Uniform Lifetime Table, a 72-year-old with $500,000 in her 401(k) would have been required to withdraw $19,531 ($500,000/25.6) during her first year of taking RMDs. That’s $1,283 more that would have been subject to income taxes compared to the smaller minimum withdrawal required under the revised table.

Meanwhile, a 72-year-old with $2 million in his retirement account would have been required to withdraw $78,125 under the older formula ($2 million/25.6). However, the updated formula results in an initial RMD of just $72,992 ($2 million/27.4), meaning this retiree would keep an extra $5,133 growing tax-deferred in his retirement account.

Bottom Line

For the first time since 2002, the IRS has updated the actuarial tables that determine the amount of money a person must withdraw from their IRA or 401(k) at a certain age. While the SECURE Act changed the RMD age from 70.5 to 72, the updated Uniform Lifetime Table has lowered the size of RMDs, allowing you to keep more of your assets in a tax-deferred account. Of course, RMDs are only the minimum amount that must be withdrawn each year. You can certainly withdraw more from an IRA or 401(k), but remember: the larger the distribution, the larger your tax bill.

Tips for Withdrawing Retirement Assets

• A financial advisor can be a trusted resource when it comes to planning for your decumulation phase. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors in your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.

• Anticipating your expenses and spending rate are vital components of retirement planning. Researchers from the Center on Retirement Research at Boston College determined the average retired household cuts its spending by 1.5-1.6% per year throughout retirement. That means, household consumption falls each year by an average of 0.75-0.80% for retirees, reaching double digits 20 years into retirement. SmartAsset’s Budget Calculator can help you keep track of your monthly expenses.

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