With the ringing in of the New Year came an update to the IRS Life Expectancy Tables which are used to calculate annual Required Minimum Distribution (RMD). The IRS has extended their estimates on Life Expectancy so basically, a RMDs will be lower using the new tables. You can find the table in the Federal Registrar.
For some background, the IRS has allowed Americans to receive a tax deduction on contributions to retirement plans like IRA, 401(k), SIMPLE. When a person turns 72 (not 70 1/2 anymore) the IRS wants to reclaim that benefit and requires a person to take a distribution from their retirement accounts each year. Taxes must be paid on that distribution. The calculation is pretty straightforward. You simply take the balance of your qualified retirement account as of 12/31 and divide it by the IRS factor. A 75-year-old with an IRA balance of $500,000 would divide by 24.6 for an RMD of $20,325. Using the old table, the factor was 22.9 or an RMD of $21,834. A savings of over $1,500. Next year, the now 76-year-old would use a factor of 23.7 So, the amount changes each year due to the balance of the account and the factor.
There are some other circumstances that a different IRS Life Expectancy Tables must be used for people that received an Inherited IRA prior to 2018 or the sole beneficiary of a qualified account is a spouse and is more than 10 years younger. Consult your Fiduciary Advisor for an update on those tables.
Now, you may be reading this and are many years away from being required to take a RMD, so you do not think this applies to you. Just be aware if you are the beneficiary of a qualified account there is a different RMD rule that will apply. Let's say you are the sole beneficiary of your father's $500,000 IRA and he passes away this year. The RMD for the you will be the IRA balance must all be distributed within 10 years. There is not a specific dollar amount each year, but all distributions will be taxable. The balance on the account just must be $0 by the year 2032. Another opportunity to work with a Fiduciary Advisor to have a distribution plan to help accomplish your financial and tax goals.