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Retirement Tip of the Month

Required Minimum Distributions in 2023

One possible silver lining to the state of the economy during 2022? It may have lowered the impact of required minimum distributions, or RMDs, on your accounts. Here’s a quick list of what you should know about calculating your RMDs this year.

If you’re retired, and over age 72, you’ve most likely already started taking RMDs from your traditional IRA or other employer-sponsored retirement account.

The stock market downturn last year may have eroded the value of many retirees’ nest eggs. The money they needed in order to support themselves. However, the silver lining to this event is that the effects of the Secure Act 2.0, resulting from the state of the economy recently, came with ways you may be able to reduce your taxable income. Therefore, you could potentially save more money.

Assuming you have other accounts you can draw from instead, and you don’t need to take RMDs in order to gain income, and that the time for RMDs hasn’t arrived yet, You see, the Secure Act 2.0 has extended the amount of time before you need to take RMDs. Therefore, it has put off the time before you need to withdraw and pay taxes on that money. Furthermore, RMDs will likely be lower this year, and the taxes on them lower as well. If you haven’t started them yet, this may be very helpful to you.

RMD Calculations

While the process of calculating RMDs might seem enigmatic to you, it’s actually quite a simple equation. The formula for your yearly RMD calculation is based off of the IRS’ Uniform Lifetime Table. The table is based on calculations of projected life expectancies. Essentially, though it just estimates the maximum number of years your retirement account might need to make RMDs for you. The distribution period gets shorter each year. How do you calculate RMDs for a given year? Well, you simply divide each retirement account’s value at the end of the previous year by the distribution period, which is based on what your age will be in the year you take the RMD.

Making the Right RMD Choices

Calculating annual RMDs is actually quite simple, but what gets complicated is worrying about which of your accounts you’re going to draw that amount from. With 401(k) accounts, it’s quite simple. Most plan providers will calculate your RMD and make the distribution on your behalf.

With other accounts, however, this issue gets more complicated. You have more flexibility, and more choices to make. For example, let’s say you have multiple IRAs.

If this is the case, you have to calculate the RMD for each of your accounts. Many IRA custodians will do this for you. But, from there, you have a few possible options for how to handle withdrawing the money. You could take separate RMDs from each IRA, take a total combined RMD amount from a single IRA, or withdraw different amounts from several IRAs that all add up to the correct RMD amount. Which of these methods is best? That depends on your own specific situation. Look into it.

Additional Tactics

There are a few other strategies that you might want to consider for simplifying RMDs and reducing their impact on your retirement. As an example, you might try offsetting the impact of RMDs on your IRAs by donating the amount of the RMD as a qualified charitable distribution (QCD) to an eligible nonprofit organization. This can eliminate your taxable RMD amount. With the Secure Act 2.0 being passed, the limit for QCDs will now be annually adjusted for inflation.

Or, you might want to consolidate all of your various retirement accounts into one single rollover IRA. This is a smart way to keep things simple and organized when it comes to your retirement strategy, in more ways than just simplifying RMDs. Look into if you’re eligible to do this: We might be able to help you learn more.

All these different scenarios have their own consequences that aren’t particularly easy to figure out on your own. You may want to work with a qualified financial professional if you want to learn your way around ways to stay financially stable in retirement. Which distribution strategy is the right one for you? We may be able to help you answer that by giving you our own thoughts. Reach out to us to learn more.

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