New RMD Formula
The Required Minimum Distribution (RMD) is the amount that individuals must withdraw each year from tax-deferred retirement accounts, such as traditional IRAs and 401(k)s, once they reach a certain age. The SECURE Act 2.0, enacted in 2022, brought changes not only to the starting age for RMDs but also updated the IRS life expectancy tables used to calculate them. So, what exactly is the new RMD formula, and how does it impact retirees?
The Basic RMD Formula
The core formula remains straightforward: RMD = Account Balance ÷ Distribution Factor
Here’s how it works:
- Account Balance: Use the total value of your retirement account as of December 31 of the previous year.
- Distribution Factor: This number is pulled from the IRS Uniform Lifetime Table, which reflects your life expectancy based on your age.
For example, if you’re age 75 with a retirement account balance of $500,000 and the distribution factor is 24.6, your RMD would be: $500,000 ÷ 24.6 = $20,325.20
What Changed in the RMD Formula?
The IRS updated its life expectancy tables in 2022 to reflect longer average lifespans. These updates slightly increased the distribution factors, meaning smaller RMDs for each age. For example, the factor at age 75 used to be around 22.9, but under the new table, it’s 24.6. That gives retirees a bit more flexibility and reduces the immediate tax burden.
In addition, the SECURE Act 2.0 raised the starting age for RMDs:
- Age 73 for individuals born between 1951 and 1959
- Age 75 for those born in 1960 or later
Why It Matters
Smaller RMDs can help retirees:
- Keep more money invested for longer
- Lower their taxable income in retirement
- Avoid spikes in Medicare premiums or Social Security taxation
Final Thoughts
The new RMD formula still follows the same structure, but the updated life expectancy factors reduce required withdrawals and give retirees more planning flexibility. It’s important to revisit your RMD strategy annually. Dimov Tax is ready to establish full compliance as well as maximum tax efficiency. Contact us today for financial clarity.