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Chase Mouchet, CFP®, CIMA® Feb 8, 2022 10:59:25 AM 3 min read

Four Takeaways from the Updated RMD Life Expectancy Tables

Starting in 2022, many retirees with IRAs and 401(k) plans will be able to take out a lower required percentage of their retirement accounts based on the IRS’s new life expectancy tables. These tables, which are used to calculate Required Minimum Distributions, reflect longer average lifespans since the last updates more than 20 years ago.  

For example, a 74-year-old retiree with a 12/31/21 IRA balance of $1 million would have been required to take out $42,016.81 based on the previous uniform life expectancy table. However, the RMD amount will now be $39,215.69 – a reduction of $2,800, or 6.6% in percentage terms.  

Here are four takeaways to consider if you are taking RMDs in retirement.

A lower RMD amount could be welcome news during tax time.

By taking a lower amount from your IRA, you could expect your taxable income to be lower, all other things being equal. Traditional IRA distributions are subject to ordinary income taxes, and a smaller RMD could help lessen the impact of other tax items such as Social Security taxation, capital gains taxes, and Medicare premium surcharges in future tax years.

However, many retirees could find that their 2022 RMD is close to last year’s amount. A lower percentage withdrawal did not necessarily translate into a lower RMD for this year, since many December 31st retirement account values reflected a strong market in 2021. The impact of these changes may be felt more in future years if the markets aren’t performing quite like they did in 2021.  

Depending on your own needs and financial resources, you may decide to maintain or increase your withdrawal amount.

Many people taking distributions may decide that lowering their RMD isn’t ideal due to increased living expenses, such as medical or food costs. Some retirees may have the financial flexibility to take that long-awaited vacation this year after delays due to the pandemic, or they may need to make a large purchase like a new car. While the RMD percentages can offer a helpful guiding point when assessing sustainable withdrawal rates, it’s important to consider other resources and plan for unknown costs such as medical care in the future.

If you are charitably inclined, giving directly from your IRA is still an excellent strategy for many retirees.

Giving money directly from an IRA, also commonly known as a Qualified Charitable Distribution, continues to be a win-win strategy for many people 70 ½ or older due to the tax benefits. IRA account holders in this age bracket can give away up to $100,000 per year directly from their IRA. The amount is paid directly to the qualified charitable organization with a QCD. The donor doesn’t get a tax deduction; however, the amount distributed as a QCD is not included as income. Since itemizing charitable deductions do not provide a tax benefit, this strategy could prove to be beneficial for those who take the standard deduction.

Smaller required withdrawal percentages could be better for your tax situation, but it could mean that your heirs are footing a higher tax bill.

In 2019, Congress passed the SECURE Act, which in most situations no longer allows heirs to stretch their required distributions over their life expectancies if inheriting a retirement account in 2020 or later. The new law requires most non-spouse beneficiaries to completely distribute inherited retirement accounts within 10 years. This 10-year rule combined with a higher balance could result in higher taxes for the heirs.

Retirees could consider strategies to help reduce the tax burden to their heirs, such as converting funds to Roth for tax-free future growth, increasing charitable giving from an IRA, or taking additional distributions during the account owner’s lifetime. It’s important to consider what your legacy means for your heirs and how the funds you have saved in your retirement accounts could impact those goals.  

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Chase Mouchet, CFP®, CIMA®

Chase brings thoughtful listening and planning skills and a devotion to maximizing the impact of wealth for our clients. Chase joined the Brightworth team in 2015 as a financial planner, having previously worked at two independent financial planning firms. He is passionate about helping clients simplify their financial lives and maximize the impact of their wealth, particularly through charitable giving.