RMDs in 2023
One possible upside to 2022’s financial climate? It could soon lower the impact of RMDs (required minimum distribution) on your accounts. Here’s a quick list of what you need to know about calculating RMDs in 2023.
If you’re retired and over age 72, you’re probably already taking RMDs from your traditional IRA or other employer-issued retirement plan accounts.
The stock market downturn of 2022 may have eroded the long-term viability of many retirees’ nest eggs, the money they needed to “keep their head above water” financially as they were no longer working. However, the silver lining to this is that the effects of the Secure Act 2.0, resulting from the state of the economy as of recent, contains some changes that may be able to save more money.
Assuming you have other accounts you can draw from instead, and don’t need to take from your accounts with RMDs to gain income, and the time for RMDs hasn’t arrived yet, you may be able to reduce your taxable income. The Secure Act 2.0 has extended the amount of time before you’re required to take your RMDs. Therefore, it has put off the time before you have to pay taxes on that money. Additionally, RMDs are likely to be lower in 2023, with the taxes on them also being less.
While the process of calculating your RMD may seem mysterious, it’s actually a pretty simple problem. The formula for your yearly RMD calculation is based on the IRS’ Uniform lifetime Table. The table is based on calculations of projected life expectancies. Essentially, though, it estimates the maximum number of years your retirement account might need to make RMDs for you. The distribution period gets shorter each year. How do you calculate your RMDs for any given year? Well, simply divide each retirement account’s value at the end of the previous year by the distribution period, based on what your age will be in the year you take the RMD.
For example, let’s say that at the end of 2022, your IRA was worth $500,000 and you were age 73, and taking your first RMD. Your distribution amount would be $18,868: $500,000 divided by 26.5.
Making Smart RMD Decisions
Calculating annual RMDs is actually quite simple. However, it gets complicated when you start to hin about which of your accounts you should withdraw that amount from. With 401(k) accounts, it’s obvious: If you’re no longer actively participating in the plan, as you’ve left that company, most plan providers will calculate your manual RMD and make the distribution on your behalf.
With other accounts, however, you have more flexibility: More choices to make. For example, if you have multiple IRAs.
If this is the case, you need to calculate the RMD for each account. Many IRA custodians will do this for you. But then from there, you have a few options about how much you want to withdraw from each account. You could:
- Take separate RMDs from each IRA account
- Take the total combined RMD amount from a single IRA
- Withdraw different amounts from several IRAs that add up to the total RMD
Which of these tactics is best? This depends on your specific situation. Look into it.
There are other strategies that you might want to consider for simplifying RMDs and reducing their impact on your retirement accounts.
For example, you might be able to offset the impact of RMDs from your IRAs by donating the RMD amount as qualified charitable distributions (QCDs) to an eligible nonprofit organization or organization of your choice. This can eliminate your taxable RMD amount up to an aggregated maximum of $100,000 per year. With the Secure Act 2.0 being passed, the limit for QCDs will now be adjusted annually for inflation. Also, it’s important to keep in mind that QCDs are not eligible as charitable deductions.
Or, you may want to consolidate all of your various retirement accounts into one single rollover IRA. This is a smart choice for keeping things simple when it comes to your financial strategy: It makes things easier for you, in more ways than just the impact on RMDs. You may be eligible to do this.
All of these different scenarios have consequences that aren’t particularly easy to figure out on your own. You might want to work with a qualified financial professional if you want to learn your way around strategies for staying financially stable in retirement. Which distribution strategy is best for you? We may be able to help by giving you our thoughts on this. Reach out to us to learn more.