By Allison L. Lee
2022 is here, and despite the very real concern retirees face as a result of the ongoing COVID-19 pandemic, there’s some good news to take heart in. Looking over a longer time horizon, the IRS expects you to live a little longer as of January 1st. And even better, it could result in a smaller tax bill.
That’s because the IRS is implementing updated life expectancy tables, based on the most recent census, for calculating how much you’ll need to take out of certain IRAs or employer-sponsored retirement accounts each year as required minimum distributions (RMDs).
The changes are essentially the next phase of updates following the SECURE Act, signed into law in December 2019, which raised the initial RMD age from 70.5 to 72 for those born after June 30, 1949. The updates are relatively modest. The differences in RMDs as a percentage of account balances are down between roughly a quarter and roughly half of a percentage point for those ages 72 to 100 – but for many people, especially toward the younger end of the range, the potential savings are nothing to sneeze at.
Because you will be expected to live longer, the IRS will be giving you longer to deplete the funds in your retirement accounts. Since your RMDs each year count as taxable income, lower RMD account balance percentages mean less taxable income.
For example, under certain circumstances someone 76 years of age with $350,000 in their IRA as of December 31, 2020 would have a 2021 RMD of $15,909. But for 2022, the same 76-year-old’s RMD would be $14,768. Again, it’s not a major change, but it’s noticeable and certainly worth being aware of. At the same time, bullish stock performance often contributes to increased IRA balances, which, in turn, increase the size of RMDs.
Your retirement plan administrators will likely be incorporating these updates automatically, but the more you understand the nuts and bolts of your retirement accounts, the better.
While you’re at it, and as you’re setting (and hopefully sticking with) your New Year’s resolutions, it’s worthwhile to be proactive in planning your RMD in as tax-efficient a manner as possible. Qualified Charitable Distributions (QCDs) are a good avenue to consider, especially for those who don’t need the money yet and might have charitable inclinations. With QCDs, retirees can donate all or portions of their RMDs to charity (up to $100,000 per year), fulfilling their RMD obligations without the RMD counting as taxable income.
QCDs have grown increasingly popular as a way to connect tax planning with charitable giving, especially since they were made permanent with the PATH Act of 2015. If you’re already supporting certain charitable causes, QCDs can be an additional tax-savvy investment in the causes that you love.
So, some good news regarding your IRA to start 2022 (and of course, it’s never too early to plan).
New RMD tables from Appleby Retirement Consulting.
About the author: Allison L. Lee
Allison L. Lee is the associate general counsel for FreeWill, a mission-based public benefit corporation that partners with nonprofits to provide a simple, intuitive and efficient platform to create wills and other estate planning documents free of cost. Through its work democratizing access to these tools, FreeWill has helped raise more than $4 billion for charity.
Allison also oversees FreeWill’s Fellows Program, a network of trust and estate practitioners from across the country who are passionate about improving access to law and increasing the role of charitable giving in estate planning. Prior to joining FreeWill, Allison spent more than a decade in private practice (most recently at a New York law firm), was rated by Super Lawyers (Rising Stars) in the area of estate planning and probate, and is a member of the New York, New Jersey, Florida, Maryland and Washington, D.C. bars.