One possible upside to 2022’s market downturn: It could potentially lower the impact that RMDs (required minimum distributions) have on your retirement accounts. Here’s a quick list of what you need to know in order to calculate RMDs in 2023.
If you’re over the age of 72 and are no longer working, you’re probably already taking RMDs from your traditional IRA or other employer-sponsored retirement account.
The market down of 2022 may have eroded the long-term viability of many retirees’ nest eggs, the money they were reliant on. However, the silver lining to this is that the effects of the Secure Act 2.0, resulting from the current state of the economy, may be able to help you save more of your money.
Assuming you have other accounts you can draw from and don’t need to take RMDs in order to gain income, and you don’t need to take them yet, you may be able to reduce your total taxable income. The Secure Act 2.0 has extended the time before you’re required to take your RMDs and, therefore, the time before you have to pay taxes on that money. Additionally, RMDs will likely be lower in 2023, with the taxes on them also being less.
The RMD Calculation Process
While the process of calculating your RMD may seem enigmatic, the methodology of it is actually rather simple. The formula for your yearly RMD calculation is based on the IRS’ Uniform Lifetime Table. The table is based on complicated actuarial calculations of projected life expectancies. But, essentially, the table estimates the maximum number of years your retirement account might need to make RMDs for you. The distribution period gets shorter every year, based on your age.
So, how do you calculate your RMDs for a given year? Well, divide 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.
For example, Say that at the end of 2022, your IRA was worth $500,000, and you were taking your first RMD this year, at age 73. Your distribution amount would be $18,868 ($500,000 divided by 26.5). Or, if you were turning 85 in 2023, your RMD would be $500,000 divided by 16, or $31,250.
Making the Right RMD Decisions
Calculating annual RMDs is relatively simple. However, what gets complicated is determining which of your accounts you should take from. With 401(k) accounts, it’s obvious. If you’re not longer actively participating in the plan, as in, you’ve left that company, most plan providers will calculate your manual RMD and make the distribution on your behalf. With other accounts, though, you have more flexibility when it comes to your options.
For example, if you have multiple IRAs, you need to calculate the RMD for each individual account. Many IRA custodians will do this for you. But how much do you actually withdraw from each account? Therein lies the question.
- You can take separate RMDs from each IRA
- You can take the total combined RMD from one IRA
- You can withdraw different amounts from several IRAs that add up to the total RMD amount
Which of these plays is the best? It depends on your individual situation.
There are other strategies you may want to consider for simplifying RMDs and reducing the impact they have by being taxed.
As an example, you may be able to offset the impact of RMDs from your IRAs by donating some (or all) of the RMD amount as qualified charitable distributions to an eligible nonprofit organization/organizations. This can lower or even eliminate your taxable RMD amount, up to an aggregated maximum of $100,000 a year. With the passage of the Secure Act 2.0, the limit for QCDs will be adjusted annually for inflation. Also, it’s important to keep in mind that QCDs are not also eligible as charitable deductions.
Or, you may want to consolidate all of your various IRA and 401(k) accounts into one single rollover IRA. This is a smart choice for more reasons besides just RMDs. You may be eligible to do this: Look into it.
All these scenarios have consequences that aren’t particularly easy to figure out on your own. You may want to work with a financial professional who can show you your way around tactics for staying financially stable in retirement. Which distribution strategy makes the most sense? We might be able to give you our thoughts on this. Contact us today.