The New Year brings good news to anyone who must take a Required Minimum Distribution (RMD) from their retirement accounts. Tax-deferred accounts – such as 401ks and Traditional IRAs – allow individuals to save during their working years and push the taxes associated with that savings out into the future.
Under current law, when the account owner reaches age 72, the IRS requires they begin taking RMDs annually. Through the eyes of the IRS, it’s time to pay the piper.
The calculation of RMDs has two components. The first part is to take the retirement account’s year-end balance from the previous year. This amount is divided by what’s known as an RMD “factor.” These factors are compiled in an IRS table that contains age ranges and a number that is associated with every age. You take the number for your age and divide it into the year-end balance. The result is the RMD that you must take for that calendar year.
The factor tables for RMDs had not been adjusted since the early 2000’s. In 2018, a study was conducted to evaluate longevity amongst retirees to see if these current amounts were still suitable. The study showed that adjustments were needed to account for the fact that retirees were living longer on average.
As a result, a new factor table has gone into effect starting in 2022. The result is a modest reduction in the amount most retirees will be required to distribute from their retirement accounts each year.
For a PDF download of the new RMD table, click here.
For example, an IRA account owner has a year-end balance $500,000 and turns 72 in 2022. The new RMD factor for age 72 is 27.4. Dividing the factor into the account balance results in an RMD of $18,248.18. Under the previous factor table, they would have to divide the account balance by 25.6, which results in an RMD of $19,531.25. Thus, the account owner is now allowed to keep over $1,200 in the account.
Any amount that can remain invested and grow tax-deferred is a positive in our view. If you notice your RMD amount for 2022 looks a little smaller than last year, this is likely the reason why. The IRS does not often make adjustments that potentially reduce taxes, so we’ll gladly welcome this change!