Why Is My 2022 RMD Smaller Than Expected When the Stock Market Is Up?

The stock market closed out 2021 near record highs, but retirees and some beneficiaries of inherited IRA accounts may notice a smaller than expected Required Minimum Distribution (RMD) for 2022. Why? The IRS has decided that you are likely to live longer! This is good news for retirees who have other income or non-retirement assets and do not need to take more than the RMD from their retirement accounts each year. Since RMDs increase the amount of one’s taxable ordinary income, the tax bill for these retirees will decrease slightly, relative to what it would have been under the old rules. By contrast, retirees who need to take more money from retirement accounts each year than required by the IRS will not be affected by this change.

How Are RMDs Calculated? As most retirees know, once you hit age 72, the IRS requires that you begin taking distributions each year (if you have not been doing so already) from your retirement accounts, such as 401k’s, 403b’s, the TSP, and traditional IRAs. The amount that you must withdraw (and pay taxes on) each year, i.e. your RMD, is calculated by dividing the year-end balance in the account by a life expectancy factor determined by the IRS. For example, a retiree who turns age 72 in 2022 and whose IRA balance was $100k on December 31, 2021, would need to withdraw: $100k / 27.4 = $3,650.

How Is This Calculation Changing? For almost 20 years, the IRS has used the same life expectancy tables, which assume, for example, that a 72-year old will live another 25.6 years, an 82-year old will live another 17.1 years, and so on. Since average life expectancies have crept upward over that time, the IRS released new life expectancy tables, effective January 1, 2022. The tables now assume a 72-year old will live another 27.4 years, an 82-year old will live another 18.5 years, etc. The result of these changes is that RMDs will decrease as compared with what they would have been using the old tables. As mentioned above, this is a positive change for those who can afford to take no more than their RMD from their retirement accounts each year.

Who Does This Affect besides Retirees? This change impacts some beneficiaries of inherited IRAs, in addition to retirees age 72 and above. The SECURE Act of December 2019 established that certain beneficiaries of inherited IRAs would be considered “Eligible Designated Beneficiaries.” This group includes surviving spouses, individuals who are disabled or chronically ill, minor children, and those who are less than 10 years younger than the deceased. Unlike other beneficiaries, who generally just have 10 years to withdraw the entire balance of inherited IRA accounts, Eligible Designated Beneficiaries are allowed to spread withdrawals from inherited IRAs over their life expectancy. Again, if they have other income or assets to rely on, they also benefit from the change to life expectancy tables since it lowers the amount of taxable income they need to realize each year.

If you have questions or concerns about this change or about your RMD for this year, please call or email us any time. As always, we will be calculating and facilitating RMD withdrawals for retired clients and those with inherited IRA accounts throughout the year.

We wish you a happy new year. Clearly, the IRS has faith in your good health, so we hope for a healthy 2022 for all of our clients and friends as well!