Have no fear, BCR is here…to help with your RMD.
The past several years have been full of many changes for RMDs. In 2019, the starting age was changed from 70 ½ to 72. In 2020, RMDs were suspended altogether by the CARES Act. In 2021, the rules for beneficiary IRAs were changed and the IRS also released new life expectancy tables for the 2022 year.
With all these changes taking place it is very important to keep an eye on your IRAs and determine your plan for taking your RMD early so that everything can be completed on time.
Before I discuss all the new rules and regulations that will apply to RMDs, I will give a little bit of background on RMDs themselves. An RMD, or Required Minimum Distribution, is the amount that the IRS requires IRA holders over the age of 72 to withdraw from their IRAs each year. Your RMD will be added to your taxable income, so it is important for investors to plan for their RMDs once they begin. RMDs can be taken at any point during the year but must be taken before the year end. You are not required to take your RMD in one lump sum, you can choose to spread the amount over several different withdrawals or even direct some to charities as a Qualified Charitable Distributions. I outline a few different scenarios for taking RMDs in my previous blog Navigating RMDs. You aren’t required to put it in your bank account or spend it either. For many, they strategically move investments from their IRA into their non-retirement account to keep it invested.
RMDs don’t only apply to traditional IRA holders though, they also apply to holders of beneficiary, or inherited, IRAs. These beneficiary IRAs have different rules, specifically the new rules established for 2021. For anyone who inherited an IRA from someone who passed away prior to 2020, they will use a different life expectancy table than those with traditional IRAs. For anyone who inherits an IRA from someone who passed away in 2020 or beyond, they will not have a required minimum but are required to distribute the entirety of the account within ten years. For the latter, there are many strategies that can be used to maximize benefits and taxes. Everyone will have different considerations when deciding how to take their RMD.
The biggest difference to note for 2022 is that the IRS released new life expectancy tables. While RMDs vary from year to year for everyone, most will see a more significant difference this year. The new life expectancy tables are used to calculate the RMD and will result in lower RMDs across the board. Meaning the IRS will not require you to withdraw as much as they might have in previous years. To demonstrate this difference, we will use Jim as an example. Jim is 75 years old and had $500,000 in his traditional IRA at the end of 2021. Jim uses the Uniform Lifetime expectancy table to calculate his RMD. To calculate his RMD we will divide the year end value ($500,000) by his factor of 24.6, this means his RMD is $20,325.20. Under the previous table his factor would have been 22.9 which would make his RMD $21,834.06.
If all of this is a little over your head, have no fear, BCR is here to help you calculate and plan for your RMD and has all the resources you need to have peace of mind.