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