Spring is upon us, and we’ve been doing this pandemic routine for over a year now. Between the global virus and our historic presidential election, the market has been more volatile than anything we’ve seen in recent history. There’s been plenty of big news demanding your attention during this time. However, in between the big news stories, there have been a few important updates to Required Minimum Distribution (or RMD) rules. While this may not have been top of mind for every investor, there have been some notable changes that warrant your attention – and yet another update is on the horizon in 2022.
In December 2019, RMD age increased from 70 ½ to 72 under the Setting Every Community Up for Retirement Enhancement (SECURE) Act, allowing investors more time to grow their retirement savings tax-deferred and explore tax planning strategies, such as Roth Conversions. Last March, you may recall that RMDs were waived under the Coronavirus Aid, Relief and Economic Security (CARES) Act for tax year 2020 only and are re-instated for 2021.
Before you get too comfortable, though, you can expect yet another major update to RMD rules on January 1, 2022. For the first time in nearly 20 years, the IRS is updating the life expectancy tables used to calculate RMDs to reflect the increasing longevity of the American population. To refresh your memory, RMDs for traditional IRA, 401(k), 403(b), or other retirement savings plans are calculated annually by dividing the prior year’s ending account balance by a life expectancy factor provided by the IRS and are counted towards your taxable income. Since the new tables reflect greater longevity (meaning greater life expectancy factors), the result for investors will be somewhat smaller RMDs starting in 2022.
But what does this news mean for you?
With most Americans living longer, investors need more savings to fund longer retirements. For those who are already withdrawing more than their RMD each year to meet cash flow needs, the decrease in RMD is a moot point. However, if your only retirement account withdrawal each year is the amount of your RMD, this update to the IRS life expectancy tables is good news. Smaller RMDs mean you can leave more money invested in your retirement account to grow on a tax-deferred basis, which is an extra boost towards meeting your savings goals.
However, the real impact of the IRS update on your savings may not be as significant as you hoped. To illustrate the effect of the new life expectancy tables, consider a 73-year-old retiree with an IRA worth $1 million. As of January 1, 2022, the life expectancy factor for a 73-year-old investor will increase from 24.7 to 26.5. The difference in this investor’s 2022 RMD based on the updated life expectancy tables is only about 0.3 basis points, or 0.003% of the total IRA account value.
While the impact of the new life expectancy tables on your retirement account value may be small, deferred taxes on your investments is hardly bad news – especially as most of us will need to fund a longer retirement than previous generations. Our team of advisors is here to sift through the headlines and determine the real impact of new legislation and tax regulations on your planning and help you make the most of your money.
Associate Financial Advisor