This is an updated version of an article that was originally published in 2023 on Kiplinger.com.
With the market ending on a positive note in 2023, many seniors who are already taking Required Minimum Distributions (RMDs) from their IRA and retirement plan accounts should plan for their 2024 RMD amount to be higher than it was in 2023.
Higher returns = higher RMDs
If a significant portion of your IRA and 401(k) accounts was invested in stocks, chances are that the value of your retirement portfolio ended the year between 8%-13% higher than it was at the end of 2022. That's largely because the S&P 500 ended 2023 with a total gain (including reinvestment of dividends) of over 26%.
While this is good news for those whose nest eggs dropped by 15% or more in value in 2022, it also may end up resulting in a higher RMD amount in 2024.
Why? Because your 2024 RMD will be calculated based on its value on December 29, 2023. That means your RMD for 2024 could be higher than it was in 2023.
RMDs are taxable income. However, since the IRS has raised the amount of the standard deduction and adjusted income tax brackets for inflation, the amount you owe may not be as much as you may have thought.
The RMD calculation process
While the process of calculating RMDs may seem mysterious, the methodology is rather simple.
Your yearly RMD is calculated using a formula based on the IRS’ Uniform Lifetime Table. The table and its associated distribution periods are based on complicated actuarial calculations of projected life expectancies. But basically, this table estimates the maximum number of years (also known as distribution periods) your retirement account may need to make RMDs to you and your surviving spouse.*
Source: Internal Revenue Service
Your distribution period gets shorter every year, based on your age. For example, if you take your first RMD in 2024 at age 73, your distribution period is 26.5 years. When you turn 74, it will be 25.5 years. When you turn 90, it will be 12.2 years.
Will you or your surviving spouse need your retirement assets to last this long? Maybe, if longevity runs in your family. In any case, the distribution period is designed to gradually increase the percentage of RMDs from your retirement accounts over time without prematurely draining your nest egg should you live to a ripe old age.
Calculating your own RMDs
So how do you calculate your RMD for a given year? By dividing the value of each retirement account at the end of the previous year by the distribution period based on what your age will be in the year you take the RMD.
Here are two hypothetical examples using the table above. Say your IRA was worth $500,000 at the end of 2023 and you were taking your first RMD at age 73 in 2024. Your distribution amount would be $18,867 ($500,000 divided by 26.5) Likewise, if you were turning 85 in 2024, your RMD would be $31,250 ($500,000 divided by 16.0).
Making smart RMD decisions
Calculating annual RMDs is relatively simple. Where it can get complicated is figuring out which accounts you should take them from.
With 401(k) plan accounts, it’s pretty much a no-brainer. If you’re no longer actively participating in the plan (i.e., you’ve left the company or retired), most plan providers will calculate your annual RMD. However, it's generally your responsibility to make these withdrawals from your accounts in a timely fashion.
With other accounts, you have more flexibility and thus more options to consider. For example, if you have several traditional or rollover IRAs, you first need to calculate the RMD for each individual account. Many IRA custodians will do this for you. The challenge comes when you decide how much to withdraw from each account.
- You can take separate RMDs from each IRA.
- You can take the total combined RMD from one IRA.
- Or you can withdraw different amounts from several IRAs that, when combined, add up to the total RMD amount.
Alternative RMD strategies
You may also want to consider other strategies for simplifying RMDs or reducing their taxable impact.
For example, you may be able to offset the taxable impact of RMDs from your IRA by donating some or all of the RMD amount as qualified charitable distributions (QCDs) to eligible nonprofit organizations.
QCDs can lower or eliminate your taxable RMD amount, up to an aggregated maximum amount per year withdrawn from one or more IRAs. With the passage of SECURE Act 2.0, the QCD limit is now adjusted annually for inflation. In 2024, the QCD limit is $105,000.
You don’t even have to be taking RMDs to make QCDs. You can start making them when you turn age 70½. One reason you might do this is to support your favorite charities while also reducing the size of one or more IRAs to potentially lower your future RMD amounts.
Keep in mind that QCDs are not also eligible as charitable deductions.
Another strategy you might want to consider is to consolidate all of your various IRA and 401(k) accounts into a single rollover IRA with a custodian that calculates your RMDs for you.
All of these scenarios have retirement and tax-planning consequences that aren’t always easy to figure out on your own. Working with an accountant and a financial adviser can help you figure out which distribution strategies make sense.
*Note that the IRS Uniform Lifetime Table and the various RMD calculations discussed in this article apply only to unmarried retirement account owners; retirement account owners whose spouse is not their sole beneficiary; or retirement account owners whose spouse is their sole beneficiary and is not more than 10 years younger than the account owner. Different calculations are required if your spouse is your sole beneficiary and is more than 10 years younger than you. Learn more at the IRS website.
This article was authored by Chris Gullotti and Jeffrey Briskin. Chris is a financial advisor and Partner located at Canby Financial Advisors, 161 Worcester Road, Framingham, MA 01701. He offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. He can be reached at 508.598.1082 or email@example.com. Jeffrey Briskin is Director of Marketing at Canby Financial Advisors.
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