Updated Info on 2022 Required Minimum Distributions
It’s been awhile since we reported on the changes for 2022 issue and we’ve received a few questions already this year so a reminder is in order.
Required minimum distributions ( RMDs) apply to owners of IRAs and 401(k)s who have turned 72 years (or who were already older before 2020). RMDs are not required for Roth IRAs.
The amount you must withdraw is determined by dividing the previous year-end value of your account by a life expectancy factor defined in an IRS table. For those subject to RMDs, Fidelity, TD and Schwab detail the RMD amount for the current year on your monthly statement and, depending on the custodian you are using, may even include the specific “life expectancy factor” as well.
Starting in 2022, the IRS is relying on new life expectancy tables that reflect the pre-pandemic increase in life expectancies. The new tables reflect increased life expectancies of about 2 years on average, which will result in slightly smaller RMDs going forward. More specifically, the tables lower the percentage that you have to withdrawal in 2022 when compared to 2021 and the percentage will continue to be lower going forward when compared to the old table.
For example, if you are 75 this year and had a $100,000 balance in your IRA as of December 31, 2021, then the factor is 24.6. Dividing $100,000 by 24.6 results in a RMD of $4,065.04 for 2022. This is the amount you are required to withdraw from your IRA and it’s taxable as ordinary income.
If the same facts applied in 2021, then the factor would have been 22.9, which resulted in a larger RMD of $4,368.81. The year over year difference from 2021 to 2022 represents about a -6.9% decrease in the amount required to be withdrawn.
For those who are looking to preserve the tax deferral from their qualified retirement accounts as long as possible, then the new table works in your favor. Over time, and based on an average life expectancy, the new table will allow you to retain an additional 5%-10% growing tax-deferred in your IRA account when compared to the old table.
Keep in mind that, life expectancy factor aside, more “value” in your retirement accounts means higher RMDs, which are taxable as ordinary income. And if you leave retirement assets to your heirs by naming them as beneficiaries, then they will inherit the tax consequences too. Spouses can treat an inherited IRA as their own and take RMDs based on their own life expectancy. Non-spouses (aside from a couple specific exceptions) inheriting IRAs after 2020 are not subject to lifetime RMDs, but rather are required to withdrawal all assets from the IRA they inherited by Dec. 31 of the 10th year following the account owner’s death.
If you inherited an IRA prior to 2020, then you can continue taking RMDs over your lifetime as you have been, however, the calculation for 2022 and going forward is different. Think about it as if the new table was in effect starting in the year that you took your first inherited IRA RMD…and that 2022 is the “reset year” to account for this change.
For 2022, owners of IRAs they inherited prior to 2020 need to look at the new Single Life Expectancy Table for the life expectancy factor for the year of their first RMD. Your first inherited IRA RMD would the year after the year in which IRA account owner died (i.e., if your parent died in 2015 and named you as primary beneficiary, then your first RMD would have been in 2016).
Once you find the factor for the starting year in the Single Life table, then you need to subtract one year from that factor for each succeeding year to arrive at your 2022 life expectancy factor. If, for example the factor was 27 in 2016 when you took your first RMD, then the factor for 2022 is 21 (27 – 6 years = 21).
Going forward, you’ll subtract 1 from the 2022 factor to come up with the next year’s factor.
Sound complicated? It might be for 2022, but it gets easier each year after so if you have questions, please reach out to your ACM Wealth Advisor.
In the majority of cases where folks are not dealing with a legacy inherited IRA, then there is nothing you need to do. You can simply look at your monthly statement, which has already calculated your 2022 RMD based on the new table. In many other cases where you have an inherited IRA, your custodian has already made the update as well.
Note: If you turned 72 in the second half of 2021 and are delaying your first RMD (up until April 1, 2022), then you still need to use the old/2021 table and the account balance as of Dec. 31, 2020 for your first RMD. For your second RMD in 2022, you’ll use the new table.
The foregoing content reflects the opinions of Advisors Capital Management, LLC and is subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. Past performance may not be indicative of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses which would reduce returns. Securities investing involves risk, including the potential for loss of principal. There is no assurance that any investment plan or strategy will be successful.