It has been almost two decades since the IRS has updated the life expectancy tables used to calculate Required Minimum Distributions (RMDs), and it appears that once we reach the 20-year mark in 2022, the IRS will finally account for the fact that life expectancies have been increasing. While it can be argued that the IRS adjustments have not been large enough to account for the increase in life expectancies in the past 20 years, any extension of life expectancies can have a positive impact by lowering the annual required withdrawals, and thus lowering the ordinary income tax you would pay on these withdrawals.
For example, assume a retiree turns 72 in 2022 and has an IRA balance of $800,000 as of December 31, 2021. Under the current rules, this individual would divide the year-end balance of $800,000 by 25.6 to arrive at an RMD of $31,250. However, under the new rules, this individual would divide the year-end balance of $800,000 by 27.4 to arrive at an RMD of $29,197. This reduction of ~7% (or $2,053) lowers the taxable income this individual would pay in 2022, while leaving more money in their IRA that would continue to grow tax-deferred.
For those of you who are currently taking RMDs, please remember that these required distributions have been waived in 2020, and in 2021, the current distribution tables will still apply. We also want you to remember that if you turned 70.5 after December 31, 2019, your first RMD will not be until the year when you turn 72, thus increasing the amount of time your retirement funds can grow tax-deferred.
If you have any questions, please reach out for a free 30-minute consultation by filling out the form below – we would be happy to help.