The IRS has updated the formulas for required minimum distributions, or RMDs, the amounts required to be taken annually from 401(k)s, 403(b)s, or traditional Individual Retirement Accounts (IRAs) in 2022. There are IRS penalties if you don’t withdraw your annual minimum.
According to a recent article from AARP titled “How an IRS Rule Update Impacts Required Minimum Distributions,” the new required minimum distribution from retirement accounts will be smaller than in previous years, and it feels like this topic has gotten a bit more complicated.
Getting the calculations right has always been a bit of a challenge. For one thing, in 2020 RMDs were suspended entirely. Before the pandemic, the 2019 SECURE Act changed the age when you had to take withdrawals from 70½ to 72. This was except for people who were already taking RMDs in 2019.
Now, if your 72nd birthday occurred before July 1, 2021, you need to take an RMD before December 31. However, if your 72nd birthday takes place in the second half of 2021, you have until April 1, 2022, to take your first withdrawal—only you’ll need to use the 2021 tables from the IRS to calculate it.
A reminder: Roth IRAs do not require any RMDs, but 401(k) Roths do.
Starting in 2022, many people will be able to take about six or seven percent less in their required minimum distributions from retirement accounts under the life expectancy tables from the IRS. A 75-year-old single woman with an IRA worth $100,000 at the end of 2021 will need to withdraw at least $4,065 in 2022, about $300 less than under prior guidelines.
What to Consider
- You need to consider whether taking less from your IRA or 401(k) or 403(b) is a good idea in the long run. If you need to take more to live on, then you need to withdraw what you need, regardless of the IRS rules. There’s no penalty for taking more, except the taxes you’ll pay.
- If you retire before age 70, before any required minimum distributions from retirement accounts are required, you might want to withdraw more from your tax-deferred retirement accounts in order to delay taking Social Security benefits. The longer you delay taking Social Security benefits, the larger your monthly payment will be. This is a good move for many Americans, especially those who are counting on Social Security for income in their 80s and 90s.
Saving On Taxes
There are ways to lessen the impact of income taxes on IRAs. People older than 70½ can donate to registered 501(c)(3) charities by making a Qualified Charitable Distribution (QCD), which is counted toward any RMD as the amount of the donation is exempted from income taxes. However, this only works if you take the standard deduction and don’t itemize charitable gifts.
Unless the rules change, converting tax-deferred IRA money into a Roth IRA is a strategy to shift not whether you pay taxes, but when. Converting traditional IRA assets during a low-income year—or a portion of traditional IRA assets—allows the money in the Roth account to continue to grow tax free and no taxes are due on any withdrawals. Unless the laws change—again.