RMD Changes in 2022

This video is going out to all of you that are either about to begin taking your first Required Minimum Distributions or RMD from your IRA accounts because you will be 72 this year, or you have been taking your RMD already.

As you know, the IRS requires this distribution as a means to begin allowing them to recover the long, deferred income taxes owed on the monies in retirement accounts including IRAs, 401ks, 403bs, etc. The Required Minimum Distribution is calculated on the year-end value of the retirement account and will fluctuate form year to year.

The IRS developed a life expectancy tables to be used for different scenarios and different types of accounts. For example;

1. Uniform Lifetime Table This table is used to calculate lifetime RMDs for an account owner’s own IRA or retirement plan participation, including the TSP.  This is the most commonly used table.

2. Joint and Last Survivor Life Expectancy Table. This table is used when a spouse is the sole beneficiary and is more than 10 years younger than the IRA owner.

3. Single Life Expectancy Table Under the SECURE Act, this table is only used to calculate inherited IRA RMDs for “eligible beneficiaries”.

You might have heard in the recent news that this year the IRS updated its life expectancy table as data has shown a shift in the lifespans over the past decades. Here is an example comparing the RMD calculation using the prior tables and the new uniform lifetime table:

Say you were age 75 on December 31, 2020, and the value of your IRA account was $500,000. Per the old IRS Life Expectancy Table, the factor for age 75 is 22.9. You would divide $500,000 by 22.9 for a Required Minimum Distribution from this account of $21,834.06.

Say you were age 75 on December 31, 2021, and the value of your IRA account was $500,000. Per the IRS 2022 Life Expectancy Table, the factor for age 75 is 24.6. You would divide $500,000 by 24.6 for a Required Minimum Distribution from this account of $20,325.20.

You will see that due to there now being an expected longer life span, the required distributions will start out a bit lower than with the prior table. In theory, as you get older and your life expectancy lessens, the higher the level of annual distribution. In concept, the IRS is trying to get you to draw down and pay taxes on the whole account by the end of your life. Lucky for us, the IRS does not know when that will be any more than we do.

One last thing, we wanted to remind everyone that is now taking RMDs. Any portion of your RMD not distributed is taxed at 50%! 

In that first year of being required to take a distribution, you actually have until April 15th of the following year to take the distribution. Every year thereafter you must take your RMD by December 31st. However, this would mean taking your first and second years’ RMDs in the same calendar year which might not be the best tax decision.

Should you discover that you did in fact miss taking a part of your RMD, and you feel you have a legitimate reason, there is a form (5329) that allows you an opportunity to request a penalty waiver, but you would still have to take the RMD that you should have once you discover the error. There is no guarantee the IRS will accept it, but it certainly won’t hurt.

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