Starting this year, there will be a change to the calculation of required minimum distributions (RMDs) from retirement accounts. People aged 72 and older are required by law to take distributions from pre-tax retirement accounts (i.e., Traditional IRA, 401(k), 403(b), and qualified annuities). This also applies to inherited retirement accounts from someone that died prior to 2021. The government mandated this law so the money in these accounts cannot be deferred forever. The good news is, less will have to be taken out of these accounts as a result of the changes to the RMD table.
There are three different RMD tables that are used:
- Single-Life Expectancy table – used for inherited retirement accounts established prior to 2021
- Joint Life and Last Survivor Expectancy table – used when your spouse is more than 10 years younger than you and is the sole beneficiary
- Uniform Lifetime – the most common table – used in every other circumstance than the two tables above
To calculate your RMD, you would take the value of your pre-tax retirement account on December 31 of the previous year and divide that by a factor based on what your age will be by the end of the current year. The factor is based on a table that the IRS determines. For example, if your IRA is valued at $100,000 on 12/31/2021 and in 2022, you will turn 75, following the Uniform Lifetime table, your factor would be 24.6. So, you would divide $100,000 by 24.6 to get an RMD amount of $4,065.04. That amount would need to be taken before the end of 2022.
This is significant because the factors that the IRS was using in previous years were lower, making RMD amounts higher. If we use the previous example, with the old Uniform Lifetime table, the factor would have been 22.9. $100,000 divided by 22.9 equals $4,366.81 compared to $4,065.04 using the new table. What this means is a potentially smaller tax bill, with more assets kept in the retirement account that can continue to grow tax-deferred longer.
Why did they do this you ask? People are simply living longer these days. Many years went by without a change to the tables and with so many medical advancements, the IRS determined that it was time for an update.