Did You Hit Age 72 in 2022? Get Ready to Take Your RMD

December 4, 2022 — Folks who were born in 1950 face their first Required Minimum Distributions (RMDs) from their IRAs and 401(k) type plans. The SECURE Act of a few years ago fixed the age for RMDs to kick in at age 72, starting with folks born after July 1, 1949. This first year the 1950 folks have until April 1, 2023 to take the distributions, but they will have to take their regular 2023 distribution by the end this year too. Slightly younger people born before 1950 had to start taking their RMDs at age 70 and 1/2, and they have to take their distributions by Dec. 31, 2022.

What is an RMD?
A Required Minimum Distribution requires that funds put into certain tax deferred retirement accounts like IRAs, 401(k), and 401(b)s have to start coming out at a certain age, now 72. Up to now these untaxed contributions were able to accumulate free of taxation, but now the piper must be paid. The RMD is determined by your life expectancy factor. At age 72 the factor is 25.6: Divide your total retirement balance by that and you get the amount. If you had $100,000, the amount of the RMD would be $3906.25. You can also work out the RMD by translating the factor into a %; 25.6 equals 3.906%. At age 100 the factor is 6.3, or 15.873%.

How Can You Take Your RMDs?

Most people have retirement accounts with brokerage firms or mutual fund companies, which make it easy to take the distributions from your non-retirement accounts. They will automatically tell you how much you have to take out, and when, because they know your balances and your age. If you have accounts with multiple companies, you will have to take a distribution applying the factor to the total balances at all of them.

Are RMDs Taxable?
Darned tootin’ they are taxable. Although retirees with modest amounts in their retirement accounts won’t be affected too much, those with over $1 million balances will face significant tax consequences, particularly as they get into their 80s and 90s. You can take some of the sting out of this by giving distributions directly to a qualified charity via a Qualified Charitable Contribution (QCD). But obviously you can’t claim a tax deduction for that contribution, and there are limits on how much you can give. RMD distributions can also affect is your Medicare premiums, since the distributions become part of the Modified Adjusted Gross Income (MAGI), on which Part B and Part D premiums are determined. The extra premiums can easily go over several hundred dollars, with a maximum monthly of $395.60 for Part B and $76.40 for Part D.

What Happens If I Don’t Take My RMD?
The penalties for non-compliance are harsh, 50% of the required amount you did not take out.

Is There Any Way to Get Around This?

One solution to having to take large RMDs is to convert your regular IRAs and 401(k)s to Roth plans, particularly when you are younger or your income drops off. The amount you convert will count as taxable income when you do it, but if you do it over a period of years or in a year when your taxable income is low, that might be a way to ease the pain in your later years. To the extent you are eligible, you can take some of the contributions and add them back into your retirement accounts and kick the can down the road a little bit (but the amount you take out still counts as taxable income). If you turn 72 this year, consider taking your first RMD in 2022, rather than waiting until April 1 of next year, so your taxable income doesn’t include 2 RMDs in 2023.

Bottom Line

Chances are, if you are required to take an RMD in 2022, you will have been notified by your financial company by now. The thing to do is make sure you act promptly to take the required distributions before the end of the year, and thus avoid the 50% penalties on the undistributed amount.

For further reading:
An Owners Manual to IRAs and 401(k)s