Starting in 2020, new legislation increased the age to begin Required Minimum Distributions (RMDs) from 70½ to 72. More recently, the IRS updated the Uniform Life Table for alignment with longer life expectancies. Note that it takes years for actuaries to work up new data for this table, and the recent changes do not reflect the downturn in life expectancies resulting from the pandemic. These updates were established pre-pandemic and scheduled to take effect in 2022.
The good news is that retirees who prefer not to withdraw from their retirement portfolios now have a couple more years of growth opportunity before they are forced to take distributions.
Because retirement portfolios fluctuate based on market performance, and your life expectancy changes with each year you continue to live, your RMD amount also changes each year. To calculate your annual RMD, you need your retirement plan’s previous year-end account balance and the most updated Uniform Life Table. To determine the correct amount, divide the year-end value by the estimated remaining years of your lifetime, based on your age on Dec. 31. This is the formula: Account balance ÷ Life expectancy factor = RMD.
The new Uniform Life Table is updated with a longer average life expectancy than the prior table, so the divisors have increased. This means that the amount required to be withdrawn is now reduced from what would have been required under the previous table.
The following are some guidelines to keep in mind when calculating, withdrawing and managing your required minimum distributions.
Once you reach age 72, you have until March 31 of the following year to take your first RMD. After that, RMDs must be withdrawn before Dec. 31.
An annual RMD may be taken as a lump sum, on as-needed basis or as regularly scheduled payouts.
Consider that if you delay taking the distribution until the end of the year, your portfolio has more time to grow tax-deferred before you reduce the balance.
As long as you don’t own more than 5 percent of the company you work for, you may delay taking RMDs from the retirement plan sponsored by your current employer as long as you continue working and contributing to the account. RMDs are not compulsory from that account until you stop working.
If you have multiple IRAs, including SEP and SIMPLE IRAs, you can withdraw the combined RMD amount from just one account (or any combination thereof).
If you have multiple 403(b) accounts, you can withdraw the combined RMD amount from just one account (or any combination thereof).
However, if you have multiple 401(k) accounts, you must withdraw RMDs from each account starting at age 72.
Married couples may not combine their RMDs and withdraw them from one account.
RMDs from an inherited IRA also may not be aggregated unless they were inherited from the same decedent.
You do not have to take an RMD from a Roth IRA because the original contributions were already taxed.
In the year you first quality for an RMD, it may not be a good to wait until March 31 of the following year to take it because you’ll have to take your second RMD by Dec. 31 of that same year. Two RMDs in one year could yield a substantially higher tax bill.