The IRS has good news for retirees starting in 2022: you can now keep more money in your tax-deferred retirement accounts thanks to lower required minimum distributions (RMDs).
For the first time in 20 years, the Internal Revenue Service has updated its actuarial tables that dictate how much a person is required to withdraw from his or her retirement accounts starting at age 72. The new tables, which now project longer lifespans, are used to calculate RMDs from individual retirement accounts, 401(k)s and other retirement savings vehicles each year. For help with planning out RMDs and meeting your retirement income needs, consider working with a financial advisor.
What Are RMDs and How Are They Calculated?
One of the primary benefits of retirement accounts are the tax advantages they provide. Traditional IRAs and 401(k)s allow retirement savers to defer taxes until they withdraw money from their accounts. This allows the money to continue to grow at a faster rate over time. However, you can only defer taxes for so long. To limit you from keeping your money in a retirement account indefinitely, the IRS requires you to withdraw a specific amount each year once you reach a certain age.
Previously, you were required to start taking withdrawals from your IRA or employer-sponsored retirement plan when you reached age 70.5. But the 2019 SECURE Act made a critical change to when RMDs begin. If you reached age 70.5 in 2019 the prior rule applied, and you had to take your first RMD by April 1, 2020. Yet if you reached age 70.5 in 2020 or later you must now take your first RMD by April 1 of the year after you reach 72.
People with the following accounts are subject to RMDs:
- Traditional IRAs
- SEP IRAs
- SIMPLE IRAs
- 401(k) plans
- 403(b) plans
- 457(b) plans
- Profit sharing plans
- Other defined contribution plans
It’s important to remember that Roth IRAs are not subject to RMDs.
Calculating your RMD is relatively easy. First, look up the market value of your retirement account as of Dec. 31 from the previous year. Then, divide that value by the distribution period figure that corresponds with your age on the IRS Uniform Lifetime Table.
For example, a 72-year-old retiree with $500,000 in her IRA would divide $500,000 by her distribution period figure, which is 27.4. As a result, she would be required to withdraw at least $18,248 from her IRA in 2022.
Why The New RMD Formula Is Good For Retirees
With the IRS raising the average life expectancy from 82.4 to 84.6, retirees will presumably need to spread their assets over more years. As a result, RMDs that begin in 2022 will be less than they were under the previous formula, which had been in place since 2002.
This is good news for retirees or anyone subject to RMDs. With smaller withdrawals required each year, more of your retirement assets can remain in an IRA, 401(k) or tax-deferred account. Smaller RMDs will lessen your tax liability and could potentially drop you into a lower tax bracket.
Under the previous Uniform Lifetime Table, a 72-year-old with $500,000 in her 401(k) would have been required to withdraw $19,531 ($500,000/25.6) during her first year of taking RMDs. That’s $1,283 more that would have been subject to income taxes compared to the smaller minimum withdrawal required under the revised table.
Meanwhile, a 72-year-old with $2 million in his retirement account would have been required to withdraw $78,125 under the older formula ($2 million/25.6). However, the updated formula results in an initial RMD of just $72,992 ($2 million/27.4), meaning this retiree would keep an extra $5,133 growing tax-deferred in his retirement account.
Bottom Line
For the first time since 2002, the IRS has updated the actuarial tables that determine the amount of money a person must withdraw from their IRA or 401(k) at a certain age. While the SECURE Act changed the RMD age from 70.5 to 72, the updated Uniform Lifetime Table has lowered the size of RMDs, allowing you to keep more of your assets in a tax-deferred account. Of course, RMDs are only the minimum amount that must be withdrawn each year. You can certainly withdraw more from an IRA or 401(k), but remember: the larger the distribution, the larger your tax bill.
Tips for Withdrawing Retirement Assets
- A financial advisor can be a trusted resource when it comes to planning for your decumulation phase. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors in your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Anticipating your expenses and spending rate are vital components of retirement planning. Researchers from the Center on Retirement Research at Boston College determined the average retired household cuts its spending by 1.5-1.6% per year throughout retirement. That means, household consumption falls each year by an average of 0.75-0.80% for retirees, reaching double digits 20 years into retirement. SmartAsset’s Budget Calculator can help you keep track of your monthly expenses.
This article originally appeared on Smartasset.com and was syndicated by MediaFeed.org.
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Life happens. A natural disaster, an emergency surgery, a roof leak — all sorts of sudden, unexpected situations could leave you scrambling for funds and needing to dig into your retirement fund. If you’ve lost your life savings or discovered you aren’t on track to have the money you’ll need for the retirement you desire, then we’ve created this post for you!
As a bonus tip, it might help to visualize what you want your retirement years to be like. Do you imagine traveling the world? Relocating to a place where it’s sunny and warm — or where you’ll be near friends and family? No matter what appeals to you, keeping your unique vision front of mind could serve as a guiding light as you develop the strategy to rebuild your retirement savings.
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In the busyness of life, it can be easy to get into the set-it-and-forget-it mode of thinking. You might not have started saving for retirement yet, or you may have created a budget that has worked okay for you in the past and you haven’t made any changes. If that sounds familiar, then you may be pleasantly surprised by the possibilities.
Could you, for example, consolidate your credit card balances into a personal loan ? If so, how much would you save? If you took that amount and put it into your retirement account, more money could be going toward investing in your own future.
Are you paying off student loans or helping your child to do so? Again, refinancing might free up cash flow that could go into retirement savings.
What apps, subscriptions and the like could you live without — ones you might not even use anymore? In total, how much more could you invest in your own retirement each month or year? What might be the cumulative effect of all of your budget-cutting strategies?
As a related strategy, are you close to paying off a large purchase? This could include a boat, an RV, or even your home. If so, you could consider earmarking whatever you’ve been paying monthly for that large purchase to go into your retirement account. If it doesn’t seem possible to commit the entire amount each month to your retirement savings, what percentage might seem doable?
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If you have a 401(k) or other employer-sponsored retirement plan, you are allowed to invest up to $19,000 of your pre-tax salary annually, a cap that the IRS says may be increased in the future because of cost of living increases. Then, when you reach the age of 50, your annual contribution limit is boosted to $25,000. Increasing your retirement contributions also reduces the amount of your income that’s taxable.
If you’re contributing to an IRA, you can contribute $6,000 annually, or $7,000 if you’re 50 or older. This is true for both traditional and Roth IRAs. Note that, if you have an employer-sponsored 401(k), you can also invest in an IRA.
And, if you reach the limits of your retirement plans with tax advantages in a particular year, you could still continue to build up your reserves with other forms of investments, whether stocks, bonds, mutual funds, or something else.
In other words, you wouldn’t have to let the limits set by the IRS stop you from investing if you have funds available for that purpose. You might just need to invest another way until the next year’s retirement-investment opportunity returns.
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Ideally, yes, your hard work would automatically be recognized and your boss would give you a raise without you needing to ask. But, it doesn’t always work that way — and SoFi has created the ultimate guide on how to get a raise.
Highlights of the guide include:
• Being clear about what you deserve in compensation. It might help define your value by researching what other professionals with your skills, experience, and education are receiving.
• Gathering facts. This could include the financial information we’ve mentioned, plus your accomplishments, what others value about your work, and what you plan to contribute to the company going forward.
• Building up your confidence. It might help to practice your pitch for a raise with trusted friends and colleagues.
• Making an appointment. You might want to set a time to give your data-based, professionally expressed, well-timed request for a raise.
Then, you could invest any raise (or bonuses) into your retirement savings.
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If you were born in 1960 or beyond, then your full retirement age for Social Security benefits, according to the IRS, is 67. There are also delayed retirement credits that you can take advantage of. In this scenario, you could earn 124% of your monthly benefit if you delay retirement until the age of 70 — a delay of 36 months.
You may decide that, yes, you’re going to keep working in your current career until the age of 70. Or, you could switch to an encore career, one that brings about a change of pace for you and allows you to focus on a specific passion, one that might offer more freedom and aligns with values you hold dear.
It could involve consulting or freelancing, or otherwise using skills, contacts and experiences in a new way, possibly even telecommuting or working a more non-traditional schedule.
This might help increase Social Security benefits while working in an exciting new career. You could also use some of your earnings to invest in retirement savings.
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It might help to review your retirement portfolio to determine if you’re investing in the best way, with “best” defined differently for each person. Each person has their own risk tolerance, and each person’s financial situation is unique.Your portfolio review might take those factors into account.
Perhaps you also have a wealth account, an investment vehicle where you contribute after-tax funds. If so, it might make sense to review that portfolio, as well, to determine if you may be able to accelerate growth.
As you look at your portfolio, would it become even more meaningful if you focused on active and automated investing platforms that could help you as an investor without paying fees.
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External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
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The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . The umbrella term “SoFi Invest” refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
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