Morgan Stanley
  • Wealth Management
  • May 23, 2022

10 Things You Must Know About RMDs and Your Retirement

Timing your retirement income? With recent regulatory changes about 2022 required minimum distributions (RMDs), it’s important to think about timing your withdrawals. Given tougher regulatory, tax, and market conditions, you may want to consider taking your RMD sooner than later. Here’s what you need to know.

1. What is an RMD?

If you have a Traditional, Rollover, SEP, SAR-SEP, or SIMPLE IRA, the IRS requires you to withdraw a RMD from the account each year, beginning the calendar year in which you turn 72 (if you were born after June 30, 1949) or 70 ½ (if you were born before July 1, 1949). You must withdraw this amount by April 1 of the following year, even if you’re still working. You’re then required to take another withdrawal from your IRA by December 31 of that year and every year thereafter. If you own a Roth IRA, RMDs don’t apply during your lifetime. 

2. How is the RMD calculated?

To calculate your RMD, simply divide the prior year’s account balance by the applicable Internal Revenue Service (IRS) life expectancy factor.

Calculation: Prior year balance on 12/31 ($) over Life expectancy factor (xx years) equals Required Minimum Distributions (RMD)

3. Why is my life expectancy important?

The IRS uses your age to determine the life expectancy factor from a uniform lifetime table. However, if your spouse is more than 10 years younger, and is the sole primary beneficiary of the account, you can use a joint life expectancy table, which may result in a lower RMD amount. 

4. What’s different with 2022 RMDs?

A few of the RMD rules have changed over the last few years. Changes affect both original owners of accounts and beneficiaries who inherited them.

  • 2019: The Secure Act raised the starting age for RMDs of account owners from 70½ to 72
  • 2020: The CARES Act waived RMDs for the year (RMDs returned in 2021).
  • 2021/2022: The IRS updated the life expectancy tables for use in calculating 2022 RMDs which generally reduce the amount required to be distributed. The updated tables can be found here;

5. How are RMDs calculated if I take my first RMD by April 1 of the year I turn 72?

If you delay your first RMD until April 1 of the year you turn 72, you’ll have to take two RMDs in the same tax year. Let’s say you take your first RMD in 2021 and wait until April 1, 2022 to take your distribution. As a result, you’ll have to take your 2022 RMD by December 31, 2022. 

6. Once RMDs begin, can the calculation method be changed?

Your marital status is determined as of January 1 of each distribution year. You may change from the uniform table method to the joint life expectancy method if your spouse is:

  • Named as the sole primary beneficiary for the entire calendar year, and
  • More than 10 years younger than you

7. If I own multiple IRAs, can I take the RMD from one IRA without disturbing the others?

You must calculate your RMD for each IRA separately. Then, you can withdraw an RMD from each account, or you can add up the RMD amount from each IRA (no need to include RMDs from 401(k) plans or aggregate with Qualified Plans) and withdraw the aggregate amount from only one IRA (other than Roth IRAs or Inherited IRAs). You may consider consolidating IRAs subject to an RMD into one account. Then you’ll only need to calculate and withdraw an RMD from one account each year. 

8. What if I forget to take my RMD?

Forgetting to take an RMD or  not receiving the full amount may result in the IRS imposing a 50% IRS penalty tax on the amount not distributed as required. For example, if an RMD was $50,000 but only $20,000 was disbursed that year, you would be subject to a $15,000 penalty (50% of the undistributed $30,000). If you receive less than the RMD amount for a calendar year, you should file IRS Form 5329. You should consult with and rely on your own tax advisor with respect to filing IRS Form 5329.

9. What can you do with the RMD money you may not need right away?

Let’s say your pension or other income has already got your expenses covered for the year. If that’s the case, here are some ideas about how you might want to put that RMD to work for the future.

  • Reinvest your RMD in a taxable brokerage account
  • Contribute to a 529 Education Savings Plan for a grandchild or loved one
  • Pay expenses out of your RMD before you cash out other investments
  • Splurge on something like a vacation or new car or make a practical “investment” such as a new roof or a more energy-efficient furnace
  • Make a charitable donation through a qualified charitable distribution (QCD)*

10. How can Morgan Stanley Virtual Advisor (MSVA) help with my RMDs?

As a MSVA client, we will calculate your RMD and include it on a separate page in your quarterly statement prior to the year you turn 72. You can also see your RMD information when you login to your Morgan Stanley Online account. We can also help with the funds distribution each year.

Schedule a conversation to discuss your RMD questions today.