- All retirement accounts--that's your 401(k)s, IRAs, 403(b)s--are subject to required minimum distributions. However, you don't have to worry about RMDs for Roth IRAs.
- The new table for RMDs has been updated to reflect current life expectancy.
- Many people who are calculating their RMDs for 2022 have seen their portfolios shrink a little bit. However, they may be in for a sticker shock when they calculate their 2022 RMD because it's calculated based on the 2021 balance.
- Don't take the RMDs first. Do the qualified charitable distribution first, because it can offset the income from an RMD and satisfy it if it's enough of an amount.
Christine Benz: Hi, I'm Christine Benz from Morningstar. Time is running out for people who are aged 72 and above and need to take their required minimum distributions from their IRAs and other retirement accounts. Joining me to discuss what you need to know about RMDs is tax and retirement planning specialist, Ed Slott.
Ed, great to see you.
Ed Slott: Thanks, Christine.
Benz: Let's talk about required minimum distributions, specifically for people who are age 72 and above. What types of accounts are subject to RMDs?
Slott: Basically, all retirement accounts--that's your 401(k)s, IRAs, 403(b)s. But there are exceptions for certain accounts like a 401(k), if you're still working, you can delay RMDs until you retire, not from an IRA. From an IRA, there's no real exception there. Once you hit 72, you have what's called a required beginning date, that's April 1 of the year following the year you turn age 72. That's when RMDs begin. Actually, the RMDs begin for the year you turn 72.
Benz: Roth IRAs, though, are indeed a carve out that if you have Roth IRA assets, and this is one of the reasons you're such a fan, you do not have to take those RMDs.
Slott: That's right. Roth IRAs can grow at your own schedule. You never have to take that money out in retirement. And if you do, it's generally going to be tax-free. So, yeah, you don't have to worry about RMDs for Roth IRAs.
Benz: There were these new RMD tables that were introduced for this year, for 2022. What are the key differences in those calculations versus the 2021 tables and the ones that were in effect before?
Slott: They were in effect for years and years, somewhere around 20 years. So, they finally updated to reflect current life expectancy. But it adds a little. It helps you a little. It adds about a year or two more of life expectancy, which lowers your required amounts, which in essence would lower your tax bill slightly. Don't expect a giant savings.
Benz: People who are calculating their RMDs for 2022, many of them have seen their portfolios shrink a little bit. But they may be in for a sticker shock when they calculate their 2022 RMD because it's calculated based on the 2021 balance. Can you talk us through that?
Slott: That is probably the number one question we're hearing from people, even advisors, which I'm surprised at, because you just said it correctly. People say, "Well, my account is down. Why should I take such a large RMD? Now it's a much larger percentage of my balance." Because as you said, that RMD for, say 2022 now, was locked in on Dec. 31 last year based on what was then a very high market value back then. So, that's locked in even if now it turns out a greater percentage of your account balance that's went down. So, you still have to take that amount. There's no breaks for account balances going down. But people ask that all the time.
Benz: You have to take that RMD before the end of this year. Your 2022 RMD has to come out before Dec. 31, and you shouldn't wait until the last minute. One question that comes up a lot in the realm of RMDs is how to reduce them. Can you give us a couple of ideas for people who either are thinking pre-emptively and aren't yet subject to RMDs, or maybe are subject to RMDs and want to try to find a way to reduce the tax bill associated with them?
Slott: Well, there's a few ways to do it. But before I say that: RMD, the M is a minimum. That's the minimum. That's what the M stands for. Required minimum distribution. I wouldn't focus on that so much. Maybe think that the M might be maximum. Maybe you want to take more. You have to look at the long-term big picture. Let's say, the Congress was toying with--sometimes they eliminate RMDs when there's a crisis or there's some even proposals to raise the age to 73, 74, 75. Let's say they raise it to 80. They didn't. I'm not saying that. But the more they raise it, the more you can put off RMDs, the shorter window all your money has to come out because after the Secure Act, you only have 10 years on the back end for most beneficiaries. So, the more you put it off, the larger the overall tax bill will be for you and your beneficiaries. That said, you can reduce RMDs once they begin by doing something like qualified charitable distributions. If you're charitably inclined, and you give to charity anyway, the QCD can satisfy your RMD amount if you do it in the right order up to $100,000 a year per person, not per IRA account, per person. So, that's one way.
Another way to reduce or put off RMDs is if you happen to be still working, say, in a company plan. Now, that still-working exception where you can delay only applies to the company plan, but maybe they allow rollovers in from your IRA to the plan. Now, you can't roll over a required minimum distribution. That has to be taken. But once you satisfy that, if the plan allows rollovers in, maybe you can put that off until you retire. But again, you're putting off a bigger tax problem. You have to look at the long-term big picture. And the item you mentioned, I'm a big fan of, I call it pre-RMDs. Because maybe you should look at voluntary RMD--if I used the word voluntary, they're not required. But maybe in your 60s, not before 59.5, because then there could be a penalty, start a long-term plan to start spreading out distributions, taking advantage of these low tax brackets over many years. Because once RMDs start, for example, Roth conversions are constrained. You can't convert an RMD to a Roth. So, they cost more at that. You can convert once you satisfy your RMD, but then you have to take more out. But look at a plan maybe in your 60s to start taking small amounts voluntarily, not required, to reduce IRA balances and get those out at lower rates. It's true; the funds will no longer be tax-deferred, but if you can get them out at lower rates and put it into a Roth IRA before RMDs begin, by the time you hit age 72 and RMDs begin, you may have very little or maybe even no IRA left, and you'll save money on RMDs, save taxes for the rest of your life.
Benz: Last question for you, Ed, relates to the timing of taking these distributions. Obviously, the clock is ticking for 2022. People need to get the funds out of there. But if they're thinking forward and thinking about the best time of year to take their RMDs, do you have any advice there?
Slott: Well, if they're doing these QCDs, don't do the RMDs first. Do the qualified charitable distribution first because it can offset the income from an RMD and satisfy it if it's enough of an amount. So, that's one thing. If you're taking it toward the end of the year like people do because they don't want to take it before they have to, I wouldn't wait till the last two weeks of December or so, because--I think I tell you this every year--but anybody who knows anything at these fund companies knows to take the last two weeks off because the telephone calls are insane--not only RMDs, all kinds of year-end transactions. It's a zoo over there, and they can't keep up with it. I would say try and get everything done two weeks before the year ends. Remember, it's a 50% penalty on the amount of the RMD you didn't take.
Benz: Ed, great advice as always. Thank you so much for being here.
Benz: Thanks for watching. I'm Christine Benz from Morningstar.
Watch "Are IRA Conversions in a Down Market a Good Idea?" for more from Christine Benz.