Reduced RMDs Coming Your Way … But Not Until 2022

Here’s some good news for people nearing or already in retirement! In the future, you will be required to take less money from your retirement plans, but the new rules won’t take effect until 2022.

That’s right. Required Minimum Distributions (or RMDs) will be heading downward starting in 2022, as the IRS recognizes that longer life expectancies mean your money needs to last longer.

Earlier this month, the IRS released new RMD life expectancy tables which kick in starting January 1, 2022 and will apply to all retirement accounts like your IRA, 401(k) or other personal or inherited retirement plans.

Here’s the details:

Why is this happening? The IRS recognized that Americans are living longer, which means your IRA funds need to last longer. The new life expectancy tables will require you to take out less money every year. That ensures your money can last longer.

When does this take effect? Not until distributions starting in 2022.

So what happens next year, in 2021? Unless something changes, you will be required to withdraw funds in 2021 under the existing life expectancy tables (the same ones you have used in previous years). As you recall, withdrawals in 2020 have been waived. To recap, “RMDs are waived for 2020, and RMDs for 2021 will be calculated under the current tables,” summarizes Ian Berger of The Slott Report, a tax research site specializing in IRAs and retirement plans.

Can you give me an example?  Under current rules, you need to start withdrawing money from your IRA at age 72. Assuming an IRA worth $300,000, your Required Minimum Distribution (RMD) at age 72 is now $11,718.75 ($300,000 divided by the divisor of 25.6). Once the new life expectancy table takes effect in 2022, the RMD would drop to $10,948.91 ($300,000 divided by the new divisor of 27.4). That’s a reduction of 6.5%.

How do the new rules help me?  Smaller RMDs mean a lower tax bill, which allows your retirement savings to keep growing tax-deferred. That will help your nest egg last longer, and give you more money to spend on yourself.

What other changes are in the works? A bipartisan retirement bill being considered in Congress (but not yet approved) would raise the RMD age to 75, letting people save and grow their money longer and delay paying taxes. We’ll keep you posted on any new developments.

About Mari Adam

Mari Adam, Certified Financial Planner™ and President of Adam Financial Associates Inc, has been helping individuals and families chart their financial futures for over twenty-five years. Have a question about your financial situation? Ask Mari!

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