This is an updated version of an article that was originally published on Kiplinger.com.
For seniors who are already taking RMDs from their traditional IRAs and employer-sponsored retirement plan accounts, the market downturn of 2022 may erode the long-term viability of their nest eggs.
However, if you have enough income from other sources that you really don’t need money from these accounts, there may be some relatively good news for you this year.
Turning 72 this year? Consider delaying your first RMD until 2024
Until recently, seniors had to start taking RMDs at age 72 (they could postpone their first RMD until April of the following year, but they would then have to take two RMDs that same year).
With the recent passage of the updated Securing a Strong Retirement Act (SECURE 2.0), the RMD age has been raised to age 73. This means if you turn 72 in 2023 you'll be able to delay taking your first RMD until 2024.
Lower RMD amounts
If your IRAs and 401(k) accounts had a mix of stock and bond funds, chances are that the value of your retirement portfolio ended the year down by 15% or more.
While this is bad news for seniors who depend on their retirement assets to provide income for everyday expenses, there’s a silver lining if you don’t need your RMDs to live on or you want to reduce their impact on your taxable income.
That’s because your RMD for 2023 will be calculated based on its value when the market closed on December 30, 2022. That means your RMD for this year could be lower than it was last year.
Why? Because at the end of 2021, the market closed at a near-record high. RMDs for 2022 were calculated based on that value. Then the market meltdown and spiraling inflation eroded the value of retirees’ portfolios. And they still had to pay taxes on RMDs that no longer reflected their nest eggs’ true worth.
However, with RMDs likely to be lower this year, the taxes you’ll have to pay on your distribution could be reduced as well, especially since the IRS has raised the amount of the standard deduction and adjusted income tax brackets for inflation.
And if the market recovers, that’s icing on the cake.
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 2023 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 2022 and you were taking your first RMD at age 73 this year. Your distribution amount would be $18,867 ($500,000 divided by 26.5) Likewise, if you were turning 85 in 2023, 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 and make the distribution on your behalf.
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 of $100,000 per year withdrawn from one or more IRAs. With the passage of SECURE 2.0, the QCD limit will be annually adjusted for inflation starting in 2023.
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 eligible as tax-deductible charitable contributions.
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.
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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 cgullotti@canbyfinancial.com. Jeffrey Briskin is Director of Marketing at Canby Financial Advisors.
©2023 Canby Financial Advisors.