Understanding RMDs and What You Need to Know for 2022

Understanding RMDs and What You Need to Know for 2022

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A required minimum distribution (RMD) is the amount of money that must be withdrawn from an employer-sponsored retirement plan, traditional IRA, SEP, or SIMPLE individual retirement account (IRA) by owners and qualified retirement plan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!