Understanding RMDs and What You Need to Know for 2022

Agemy Financial

November 26, 2021

How well do YOU understand RMDs? With the RMD deadline looming, you need to take action now before it costs you big bucks. 

A required minimum distribution (RMD) is the amount of money that must be withdrawn from an employer-sponsored retirement plan, traditional IRA, SEP, or SIMPLE individual retirement account (IRA) by owners and qualified retirement plan participants of retirement age. RMDs are calculated separately for each account and must come out of said account unless an exception applies.

There’s still time to withdraw your required minimum distribution (RMD) from your traditional IRA, 401(k) or other retirement account (except a Roth IRA) before the end of the year…but you should hurry! The 2020 RMD suspension was for one year only, so don’t think you can skip it again in 2021. And if you don’t take enough out of your retirement plans this year, you could be hit with a 50% penalty from the IRS on the amount not distributed as required. Here’s what you need to know for 2022.

RMD Tables for 2022

In 2022, various life expectancy tables used by owners and beneficiaries to calculate required minimum distributions (RMDs) from retirement plans, are being updated. This is being done to reflect the increase in life expectancies experienced since the current tables came out in the early 2000s.

These changes mean that smaller distributions will be required to be taken on an annual basis, resulting in less taxation and longer lasting account balances which in turn creates an opportunity to grow the funds that are in the account. You can calculate your 2022 RMD by taking your Dec. 31, 2021, account balances and dividing by a factor from an IRS table.

If you are single or married to someone not more than 10 years younger than you, use 2022 Table III, Uniform Life Table which lists the factor for a 72-year-old at 27.4. If your spouse is more than 10 years younger than you, use the factor in 2022 Table II, Joint and Last Survivor Life Expectancy.

Impact of RMDs in 2022  

Beneficiaries of IRAs, retirement plans and nonqualified annuities who will start using their life expectancy to take out the annual RMD in 2022 will use the new factors from the Single Life table to start their payout schedule. Those beneficiaries who have been using their life expectancy to take out their annual RMD need to adjust the life expectancy used in 2022 to reflect these new tables.

For many owners and beneficiaries, the overall increase in life expectancy represented in the updated tables is a good change. These changes will reduce the taxation on required distributions and provide more opportunity for growth and longer lasting account balances. If you’d like to learn more about the payout options beneficiaries of IRAs and nonqualified annuities check out our RMD webinar on our website.

Planning for the Future 

At this time of year, the most important thing is that you get the ball rolling now! Looking into the years ahead, your first RMD (for 2022) may be taken as late as April 1, 2023. Only this first RMD for 2022 can be delayed into the following year. Your second RMD will be for 2023 and will be due by Dec. 31, 2023. Your 2024 RMD needs to be out by Dec. 31, 2024 and so on every year for the rest of your life.

If you don’t take the first RMD in 2022 and delay it into spring of 2023, you will be taking two RMD in 2023 and reporting the income from both on your 2023 return. That may or may not be problematic; If your 2022 marginal tax rate will be lower than 2023, delaying is probably not wise. If your 2023 marginal tax rate is lower than 2022, delaying could save you some money. To avoid taking two RMD in 2023, don’t delay taking your 2022 RMD and take it during 20222. The 2022 RMD can be taken any time in 2022, even before you turn 72. The IRS automatically counts any distributions taken in a given year as part of the RMD for that year until the RMD is met.

If you have retirement accounts, you owe it to yourself to understand the rules that apply to distributions, such as the RMD rules discussed here. And at Agemy Financial Strategies, we can help with this often complicated process. Our experienced advisors carefully explain the calculations necessary to convert to the new RMDs, as well as a breakdown of all of the new tables for those looking for a by-the-numbers approach.

Final Thoughts 

It’s important to note, a large RMD can push you into a higher tax bracket. One strategy for reducing the amount of RMDs is to make a qualified charitable distribution (QCD). If you’re 70½ or older, a QCD allows you to distribute up to $100,000 tax-free directly from an IRA to a qualified charity and to apply that amount toward your RMDs.

In addition, the income-based limits on charitable deductions don’t apply. Any amount excluded from your income by virtue of the QCD is similarly excluded from being treated as a charitable deduction. If you haven’t withdrawn the necessary funds yet, don’t delay. Contact the financial advisors at Agemy right away for help setting up a distribution.

At Agemy Financial Strategies, we have an array of will and retirement planning solutions to guide you through the entire process all with the help of our trusted financial planners. If you have any questions on our company, services, values and more, contact the team at Agemy Financial here today. Our highly experienced financial advisors in both Denver, Colorado and Guilford, Connecticut are waiting for your call!

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2022 Tax Inflation Adjustments

Agemy Financial

December 08, 2021

On Nov. 10, 2021, the IRS announced inflation adjustments for 2022 affecting standard deductions, tax brackets, and more. The changes (effective when you file in 2023) are the result of higher inflation in 2021. There are also changes to the alternative minimum tax, estate tax exemption, earned income tax credit and flexible spending account limits, among others. 

Over the past few years, your tax bill has been affected by many law changes. These changes can be somewhat confusing at times. The best way to be prepared for these changes is to make year-round tax planning your top priority.

Overview

Recently, the IRS announced higher federal income tax brackets for 2022 due to the rise of inflation. The standard deduction is increasing to $25,900 for married couples filing together and $12,950 for single taxpayers. The consumer price index surged by 6.2% in October compared to the previous year, the biggest jump in more than three decades.

Here are a couple ways Agemy Financial Strategies can help you make the necessary adjustments for your tax planning in 2022 and beyond.

Last Chance for Deductions and Credits

Several deductions and credits will expire in 2021. It’s important to take advantage of these credits and deductions now to consider how their elimination could affect your income and corporate tax rate in 2022. The best way to do this is to consult with your tax advisor to see what credits and deductions you qualify for.

The Employee Retention Tax Credit is an incentive that was created within the Coronavirus Relief and CARES Act that was intended to encourage employers to keep employees on the payroll as they navigate the unprecedented effects of COVID-19. With ERTC, companies can get a maximum of $21,000 for keeping workers employed through September 30, 2021. However, if you started your business after February 15, 2020, it’s considered a recovery startup business, and the maximum credit is $50,000. Learn more by reviewing IRS Notice 2021-49.

If you paid qualified sick or family leave related to COVID-19 or vaccinations through September 30, 2021, you may be eligible for a credit due to the Families First Coronavirus Response Act (FFCRA) and American Rescue Plan (ARP). Review the IRS comparison chart to see how rules for time frames in 2021 differ.

As of now, you can deduct expenses paid for with PPP loans. Guidance may change before tax filing time, so it’s very important to track payroll and fees paid with PPP funds or other government grants or loans.

2022 Tax Year: Leverage these deductions before they expire

2022 will be the last year you can take the total deductions for Section 179, bonus depreciation, and qualifying business meals. Although this could change, it’s a good idea to take advantage of these deductions before the January 1, 2023 deadline to acquire and place assets into service.

For 2021, the maximum expense deduction is $1,050,000. This limit is reduced by the amount by which the cost of Section 179 property placed in service during the tax year exceeds $2,620,000. Although the TCJA offers deductions for 50% of qualifying client-related business meals, the Consolidated Appropriations Act (CAA) made an exception for 2021 and 2022.

Further Adjustments

The IRS also made other inflation adjustments, such as changes to the alternative minimum tax, a parallel system for higher earners, and an increased estate tax exemption. Moreover, there’s a boost for the earned income tax credit, a write-off for low- to moderate-income families, and higher flexible spending account limits, among other changes. The key takeaways of these changes include:

  • Basic tax rates have not changed for 2022 although income levels (brackets) for each rate have.
  • Standard deductions and about 60 other provisions have been adjusted for inflation to avoid bracket creep.
  • The maximum Earned Income Tax Credit for 2022 will be $6,935 vs. $6,728 for tax year 2021 for taxpayers with three or more qualifying children.
  • Basic exclusion for decedents who die in 2022 will be $12,060,000 vs. $11,700,000 for 2021.
  • The annual gift exclusion for calendar year 2022 will be $16,000 vs. $15,000 for 2021.

Workers may also save more to 401(k) plans in 2022, according to last week’s announcement. But there won’t be a higher limit for individual retirement accounts.

Final Thoughts 

Lastly, before making any tax and/or business decision, you should always consult a professional who can advise you based on your individual situation. Understanding tax strategies and managing your tax bill should be part of any sound financial approach. Some taxes can be deferred, and others can be managed through tax-efficient investing. With careful and consistent preparation, you may be able to manage the impact of taxes on your financial efforts.

A strong tax planning strategy can save you money on retirement withdrawals, keep your investments efficient, help you give more to charity, maximize your estate, and put more money in your pocket. At Agemy Financial Strategies, our seasoned financial advisors are highly experienced in managing taxes and understand the importance of a well-executed tax plan for financial success. Click here to find forms, explanations, and other tools to help you manage your taxes.

For more information on 2022 tax inflation adjustments and tax advising services, contact us here today.

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The Update on the Proposed Reconciliation Bill

Changes are again said to be underway at the Whitehouse level. And it could severely affect your retirement. Here’s what you need to know…

Under the Reconciliation proposal, starting in 2023, employers with five or more employees would have to offer a retirement plan and automatically enroll employees, diverting 6% of their pay to a retirement account. Then write about the scaled cutbacks and what could lie ahead.

This plan would also create many universal programs as well as assist families with child care and send them the enhanced child tax credit for another year. The problem with the proposed Reconciliation Bill is how Democrats will pay for it. Here are a couple things to keep your eyes on for 2023.

Automatic Enrollment Plans

The legislation requires employers with more than five workers to provide access to a retirement plan that automatically enrolls employees by 2023. Governments and churches are exempt from the mandate. The automatic contribution percentage would start at 6 percent for qualified employees and would auto-escalate up to 10 percent during the fifth plan year. Employers would not be required to make contributions to the plan.

Employees would be able to opt out and could change their investment election and deferral rate. Employers that do not offer an automatic contribution plan or arrangement would be charged an excise tax of $10 per day per employee for noncompliance (with certain exceptions and adjusted for inflation). To offset costs for employers, the bill provides an enhanced employer plan startup credit.

A Limit on the Size of 401(k) Accounts

If a worker’s combined retirement account balances—including 401(k) and other employer-sponsored defined contribution plans and IRAs—exceeded $10 million (as adjusted for inflation) at the end of a taxable year, the account holder would have to reduce his or her combined account sizes by taking a distribution in the following year.

The minimum distribution generally is 50% of the amount by which the individual’s prior year aggregate account balances exceed the $10 million limit. These new limits would be effective for plan years beginning in 2022.

A National Paid-Leave Program

Beginning in July 2023, the bill provides up to 12 weeks of federal benefits to replace lost wages due to time off for medical leave or caregiving for an ill relative. The taxpayer-funded program covers all full-time and part-time workers without regard to employer size, although employers with fewer than 50 workers may be eligible for assistance grants.

While the bill follows the Family and Medical Leave Act (FMLA) in terms of leave events, it goes beyond the FMLA by including a much broader definition of covered family members. Eligible workers can apply for benefits if they have at least four caregiving hours in a week. Benefits would replace 85% of lost wages for the lowest-income workers and gradually decrease, replacing just 5% of wages for workers earning up to $250,000.

Lower Affordability Threshold for Employer Health Plans

Under the ACA, the lowest-cost, self-only health plan option an employer offers cannot charge employee premiums that exceed 9.5 percent of an employee’s income. The threshold is adjusted each year based on premium rates and in 2021 rose to 9.83 percent. It is set to fall to 9.61 percent in 2022.

The Ways and Means Committee proposal would permanently reduce the affordability threshold to 8.5 percent of an employee’s income and eliminate the indexing requirement, so the 8.5 percent requirement would not increase over time. This change would go into effect beginning with the 2022 plan year. The proposal would also make permanent the American Rescue Plan Act increased federal

Paying for the Reconciliation Bill

House Democrats have gone back and forth trying to figure out ways to pay for the proposed Reconciliation Bill. In the framework, President Biden ultimately settled on a mix of corporate and individual revenue raising measures.

  • Corporate taxes

The framework would put in place a 15% minimum tax on the corporate profits that large companies report to shareholders, not to the Internal Revenue Service. This would apply to companies with more than $1 billion in profits. It would impose a 15% minimum tax, calculated on a country-by-country basis, that American companies pay on foreign profits. This is consistent with an agreement Biden recently won among 136 countries. 

  • Taxes on the rich

The wealthiest Americans would pay a 5% surtax on income above $10 million, and an additional 3% levy on income above $25 million. The framework would also close the loopholes to allow some affluent taxpayers to avoid paying the 3.8% net investment income tax on their earnings.

  • IRS enforcement

The framework would beef up IRS enforcement so that it can ensure that people are paying what they owe to the IRS. The new enforcement measure would focus on Americans with the highest incomes, not those earning less than $400,000 a year.

Final Thoughts

While the Reconciliation Bill is still in the works and not yet finalized, there are many ways you can stay on top of it and plan accordingly. At Agemy Financial Strategies, we have an array of will and retirement planning solutions to guide you through the entire process, all with the help of our trusted financial planners.

If you have any questions on our company, services, values and more, contact the team at Agemy Financial here today. Our highly experienced financial advisors in both Denver, Colorado and Guilford, Connecticut are waiting for your call!

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