The new RMD rules can help lower your tax bill, but for some people, required withdrawals in 2022 may still be higher than last year’s. (Photo: Viktor/Picjumbo)
Question: I thought retirement account RMDs (Required Minimum Distributions) were going down in 2022 thanks to a new and more favorable RMD table. But when I looked at my 2022 RMD required withdrawal amount, I saw it is higher than last year’s. What’s up with that?
Answer: You’re not imagining things. Yes, the RMD calculations in 2022 have changed. The IRS introduced a new RMD table that will generally result in lower RMD withdrawals, but there are exceptions.
Here’s the kicker. The 2022 RMDs will be lower than before assuming no change in your age and no change in account market value. And therein lies the rub. Last we looked, we’re all getting older each year, and fortunately, our retirement accounts have – in most cases – been getting larger. We explain below what’s been going on with retirement withdrawals and why your required withdrawal might be bigger, not smaller, in 2022.
The IRS introduced a new withdrawal table
Life expectancies have been increasing. In recognition of that fact, the IRS introduced new life expectancy tables earlier this year. These are the tables that tell you how much money you need to withdraw each year from your retirement account if you are age 72 or over, or are the beneficiary of an inherited retirement account.
For example, prior to 2022, you had to withdraw about 4.72% of your account balance in the year you turned 77. Now, when you turn 77, you need to withdraw only roughly 4.37% of your account balance. That’s a small reduction, and shows the impact of the new withdrawal tables.
So why are my RMDs not going down more?
Well, for a start, you are one year older this year. Even though withdrawals across the board have gone down, each birthday you celebrate brings slightly higher required withdrawals. So if your age 77 withdrawal is 4.37% of your account, your age 78 withdrawal will be 4.5%. While withdrawals are lower with the new tables – assuming market values stay steady – they still increase as you age.
My RMDs are actually higher than before? Is that possible?
Don’t be unhappy. If your RMDs are higher than last year, there’s a good reason. It means your investments have done well.
Here’s a hypothetical example.
Janet (not a real client) has an IRA account. In 2020, when Janet was age 79, her RMD was waived due to the coronavirus pandemic. She was not required to withdraw any money. That made Janet happy, because it meant lower tax bills.
In 2021, Janet turned age 80 and her withdrawal requirements resumed. Her RMD for the year was based on her previous year account market value of $550,000, the value as of 12/31/2020. Her RMD divisor was 18.7, requiring her to withdraw $550,000/18.7, or $29,411.77. That’s about 5.35% of the prior year account balance.
Now it’s 2022. Janet is 81 years old this year. The RMD table has been revised to account for longer lifespans. Prior to the change, Janet would have used a divisor of 17.9, requiring Janet to withdraw 5.59% of the account. Now, thanks to the new tables, her divisor is 19.4, which requires a lower withdrawal of 5.16%. That is a smaller percentage than she withdrew in 2021.
So why isn’t Janet happy? It’s simple math. Janet’s IRA grew in value over the past year, even though she had to withdraw almost $30,000 in RMDs in 2021. At the end of 2021, her account value reached $600,000. Her 2022 RMD is calculated as $600,000/19.4, or $30,927.84. That’s more than Janet had to withdraw in 2021, hence her displeasure.
Of course, if the IRS had not changed the calculations, Janet would have had to withdraw $33,519.55, so her 2022 RMD has been cut almost $3,000 thanks to the new rules. Unfortunately, it is still more in dollar terms than it was last year in 2021, but that’s because Janet is one year older and her account (lucky for her!) has increased in value.
The new rules will still save you money
The new RMD tables will reduce your required withdrawals in percentage terms and will save you money, compared to the old rules. But the only way to shrink your RMD in dollar terms is to stop getting older (you wish!) or start getting poorer (you don’t wish!).
If your retirement accounts are directed toward growth investments, like those of our hypothetical retiree Janet, your RMDs may keep increasing or deflate only gradually. Retirees with more conservative, low-growth investments may see RMD withdrawals drop faster year to year.
But however you slice it, RMDs are a fact of life. The IRS wants you to take money out each year so it can collect taxes. The new rules will help reduce the tax bill.
Don’t worry! We’ll help you with the calculations
Let’s face it. RMD calculations are getting more and more complicated. (If you got lost in the calculations, above, we get it!). The IRS recently changed the rules so RMDs start at age 72 instead of 70½. The SECURE Act just changed the rules for retirement account inheritors, so one set of rules applies for deaths before 2020 and another set for deaths after 2020. The new RMD tables are relatively simple for account owners, but require a tricky one-time reset for inheritors.
If you’re a client, rest easy. We’ll automatically do the calculations for you. If you are a DIY investor, better brush up on the rules. They are commonly misapplied, and IRS penalties are stiff.
Don’t forget other techniques to reduce that RMD tax bill
Here are some final tips. If you really don’t need to spend the RMD withdrawal, don’t. The IRS says you have to take it out. It does not say you need to spend it. You can simply take out the RMD, pay the taxes, move the money to your trust or individual account, and let it keep growing.
Or, if you are charitably inclined, talk to us about gifting some of your RMD funds to charity via a QCD (Qualified Charitable Distribution). These are becoming more and more popular with our clients. When you make a charitable gift from your IRA, you bypass the RMD and the tax bill altogether. Talk about a great way to do good AND save on taxes!
Want to learn more? Read our previous article here:
How To Minimize Taxes On Those Retirement Distributions
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