Age for Required Minimum Distributions from Retirement Accounts increases to 73 in 2023

RMD Age Goes Up

Starting in 2023, you will have to start taking RMDs from your traditional IRAs, traditional 401(k)/403(b)s, and Roth 401(k)/403(b)s at age 73. Starting in 2033, the age will increase to 75.

RMDs: An IRS Change is Making Them Smaller in 2022

 The way you calculate your required minimum distribution (RMD) just changed.

"The methodology of calculating your required minimum distribution (RMD) is rather simple. Your yearly RMD is calculated using a formula based on the IRS’ Uniform Lifetime Table. Basically, this table estimates the maximum number of years (also known as distribution periods) your retirement account may need to make RMDs to you and your surviving spouse" writes CFP Chris Gullotti, for Kiplinger's. 

"Your distribution period gets shorter every year, based on your age. For example, if you take your first RMD in 2022 at age 72, your distribution period is 27.4 years." When you turn 74 it will be 25.5 years . When you turn 80 it will be 20.2 years, etc.  

The RMD amount is based on the value of your retirement accounts at the end of the previous year. "Say your IRA was worth $500,000 at the end of 2021 and you’re turning 72 in 2022. The IRS distribution period for 72-year-olds is 27.4 years. So, if you divide $500,000 by 27.4 years, you get $18,248. That’s what your RMD for 2022." 

"With 401(k) plan accounts... most plan providers will calculate your annual RMD and make the distribution on your behalf."

"With other accounts you have more flexibility, and thus more options to consider. For example, if you have several traditional or rollover IRAs, you first need to calculate the RMD for each individual account. Many IRA custodians will do this for you. The challenge comes when you decide how much to withdraw from each account."

• You can take separate RMDs from each account.
• You can take the total combined RMD from one account.
• Or you can withdraw different amounts from several accounts that, when combined, add up to the total RMD amount.

"Or, you might want to consolidate all of your various IRA and 401(k) accounts into a single rollover IRA with a custodian that calculates your RMDs for you."

"Another option: You may fulfill your annual RMD requirements without having to pay taxes on them by making a qualified charitable distribution of the RMD directly from your IRA custodian to a qualified public charity."

Paying taxes on tax-deferred retirement accounts

"Q: My wife has a 403(b) account. We have read that if we were to withdraw money to, say, pay off our mortgage, the government will tax the withdrawal. Is this true, and if so, why is there a tax on those funds, especially for seniors?

A: I get this question quite a bit.

People have saved for decades in tax-advantaged retirement plans such as a 401(k) or 403(b) looking forward to the time they can tap the money. But it’s a rude awakening when they realize the taxes that are owed. It seems unfair because what’s on paper is not what they will net.

But that’s the bargain you agreed to when you were allowed to invest pretax money into such plans. Eventually, the IRS will want its cut. This is also why there are required minimum distributions or RMDs.

“You cannot keep retirement funds in your account indefinitely,” the IRS reminds taxpayers.

If you don’t take any distributions, or if your RMD is not large enough, you may have to pay a 50 percent tax on the amount not withdrawn as required.

As the IRS explains it, your required minimum distribution is the minimum amount you must withdraw from your account each year. You generally have to start taking withdrawals from your retirement plan account or IRA when you reach 72. It used to be 70 ½. Roth IRAs do not require withdrawals until after the death of the owner.

Here are the retirement accounts that fall under the RMD rules:

— Employer-sponsored retirement plans, including profit-sharing plans and 401(k), 403(b) and 457(b) plans.

— The Thrift Savings Plan (TSP), the federal government’s version of a 401(k).

— Roth 401(k). Even though you don’t have to pay income tax on the withdrawal, you still have to take an RMD. A Roth IRA does not require withdrawals until after the death of the owner.

— Traditional IRA.

— Simplified Employee Pension (SEP) and Savings Incentive Match Plans for Employees (SIMPLE).

But there are always exceptions and caveats in tax law. The IRS has an FAQ page if you need additional information.

So, yes, as frustrating as it may be, your withdrawals will be included in your taxable income."

Thanks to Michelle Singletary, author of "Color of Money" column in The Washington Post.

 

Qualified charitable distributions that save retirees on their income tax bill

Consider Giving Your Required Minimum Distribution to Charity

"If you're over 70½, you can give up to $100,000 each year tax-free from your IRA to a 501(c)3 charity, called a "qualified charitable distribution" or QCD. The gift counts as your required minimum distribution but isn't included in your adjusted gross income. (Even though the minimum age for RMDs rose to 73, it's still 70½ for QCDs.)" Source: Start Planning for Your 2021 RMDs Now by Kimberly Lankford, USNWR, https://money.usnews.com/money/retirement/iras/articles/start-planning-for-your-rmds-now

QCDs can come from a TRADITIONAL IRA, not a Roth IRA because you've already paid taxes on the contributions to your traditional IRA but not your Roth.

You must be at least 70½ at the time of the distribution. A QCD can be made after age 70½ even if you're not subject to RMDs yet (because you're under age 73, as of 2024).

RMDs are required because you took advantage of a tax break while savings for retirement; check out my blog posts on required minimum distributions.

This can be especially helpful if you don't itemize your income-tax deductions and wouldn't be eligible for much of a tax break for your charitable contributions. Keeping the donation money out of your AGI can also help you avoid the Medicare high-income surcharge and may reduce the portion of your Social Security benefits that is subject to income taxes. Medicare participants who earn a high income have to pay an IRMAA, an extra charge on Medicare Parts B and D. The fee kicks in if you make more than  $103,000 in 2024 or if you and your spouse collectively earn over $206,000 in 2024).

Far fewer tax payers itemize their deductions now that the standard deduction is $29,200 for married couples filing jointly. The standard deduction for a single person will be $14,600 in 2024 (for income earned in 2024 and tax returns filed in 2025).

• If you are 65 or older, single, married filing separately, or head of household, you may increase your standard deduction amount. If you are a single senior taxpayer, you can claim an additional standard deduction of $1,950, married seniors are entitled to an additional $1,550.

• If both of you are 65 or above, the increase in the standard deduction is equal to $3,500.

Qualified charitable distributions are probably the best tax break available for retirees and are underused. Donate the money from your IRA to charity before making other kinds of charitable contributions. Ask your IRA administrator for the procedure – the money must be transferred directly from your IRA to the charity for it to stay out of your AGI.

Note that the charity will send you a charitable donation receipt BUT you cannot claim a charitable deduction for a QCD. So be sure to keep track of which donations were made through a QCD. Your IRA custodian has no way of knowing if a particular distribution meets all the requirements for a QCD.  

Required Minimum Distributions from taxable retirement accounts

Required Minimum Distributions (RMDs) are designed so that the government can start recouping taxes from retirement accounts such as traditional (NOT Roth) IRAs, 401(k)s, 403(b), 457 and other tax-advantaged accounts. Congress just passed a law to delay the date at which one must start withdrawing funds and paying taxes on the withdrawals.

The rules on when retirees must take required minimum distributions (RMDs) changed as of Jan. 1, 2020, thanks to the SECURE Act, which was signed into law on Dec. 20, 2019.
The SECURE Act now delays those required distributions until age 72.

If you were born on July 1, 1949, or later, you do not have to take an RMD until age 72.

If you were born before that, you fall under the old RMD rules, and you'll be forced to withdraw money (whether you need it or not) every year starting after age 70½.

"The required minimum distribution for any year is the account balance as of the end of the immediately preceding calendar year divided by a distribution period from the IRS’s “Uniform Lifetime Table.” A separate table is used if the sole beneficiary is the owner’s spouse who is ten or more years younger than the owner." This info is from the IRS website but they have not yet (1/13/20) updated the site to the new age of 72. 

Notably, RMDs for individuals who turned 70 1/2 in 2019 are not delayed, and instead, such individuals must continue to take their RMDs under the same rules prior to passage of the SECURE Act. Despite the delay in the starting age for RMDs, though, Qualified Charitable Distributions (QCDs) from IRAs will not be affected by the SECURE Act; accordingly, QCDs may still be taken from IRAs as early as age 70 1/2. QCDs from TRADITIONAL IRAs allow the taxpaper to contribute directly to a 501(c)3 organization from a taxable traditional IRA and avoid paying taxes on the withdrawal from the IRA.