People expect a complicated formula. It isn't one. This week we're walking through David's guide to required minimum distributions, and yesterday covered when they start. Today: how much you have to take.
How is your RMD calculated?
Take the account balance from December 31 of last year and divide it by a factor from the IRS Uniform Lifetime Table. That's the minimum for this year.
That's it. One division.
What does that look like on $1,000,000?
- Age 73: factor 26.5, about 3.8% of the balance, roughly $37,700.
- Age 75: factor 24.6, about 4.1%, roughly $40,700.
- Age 80: factor 20.2, about 5.0%, roughly $49,500.
- Age 85: factor 16.0, about 6.3%, roughly $62,500.
- Age 90: factor 12.2, about 8.2%, roughly $82,000.
Notice the pattern. The factor shrinks every year, so the share you must take grows with age. At 73 it's under 4%. At 90 it's over 8%.
One exception: a different table applies when your spouse is more than 10 years younger than you and is the sole beneficiary of the account.
What rules trip people up?
- IRAs can be combined. Figure the RMD for each IRA, then take the total from any one or more of them. 403(b) accounts can be combined with each other the same way.
- 401(k)s can't. Each 401(k) or similar workplace plan must pay out its own RMD.
- An RMD can't be rolled over or converted. It can't go into another retirement account or be converted to a Roth. The required amount has to come out first.
- It's a minimum. You can always take more, and every dollar is taxed as ordinary income.
Did the tables change?
Yes, a little. The IRS updated its life-expectancy tables for 2022 to reflect longer lifespans, which slightly lowered required amounts.
But here's David's real point: the size of the RMD is often not what does the most damage. It's what that income sets off, which is where the rest of this week is headed.
What should you do with this?
- List every Traditional IRA, 401(k) and 403(b) you own, with its December 31 balance.
- Note which accounts can be combined for the RMD and which must each pay their own.
- Estimate what the RMD adds to your taxable income this year.
Tomorrow: what happens if you miss one, and why it's less scary than it used to be.
The full table and the rules are in David's guide, The Hidden History of the Rule That Taxes Your Retirement. If you'd like to run your own numbers alongside your tax professional, you can begin the conversation here.
This is Part 3 of The Rule That Taxes Your Retirement, a seven-part series from David Schaeffer's guide. Examples are illustrations, not projections. For education only. Not tax, legal or investment advice.
Disclaimer: The information in this article is for educational purposes only and does not constitute tax, legal, or investment advice. Tax laws change frequently, and individual circumstances vary. American Retirement Advisors does not provide tax or legal services. Before making any tax-related decisions, consult a qualified CPA, tax attorney, or financial planner who can evaluate your specific situation.