Millions of Americans are reaching retirement age. Additionally, more Americans are leaving the workforce early. As a result, those people are looking for the best way to financially plan for their futures and maximize their retirement income. Luckily, a recent change made by the IRS will help seniors who have retirement funds.
When retirees reach a certain age, they have to withdraw money from their retirement accounts every year. If they fail to do so, they face stiff penalties from the IRS. The government determines how much money each retiree must take out of their retirement income accounts every year. Retirees can take more than their RMD if they want. However, they have to take the minimum in order to avoid penalties.
The IRS uses a life expectancy table to determine a retiree’s required minimum distribution. Those tables changed at the beginning of the year. This year, the IRS raised life expectancy from 82.4 to 84.6. This change will allow seniors to take smaller disbursements from their retirement funds every year.
How This Change Affects RMDs, Retirement Income
The life expectancy change will help seniors retain a bigger balance in their retirement income accounts. An individual’s RMD changes every year. Each year, an individual takes the combined amounts in their retirement funds and divides that number by a distribution period.
The distribution period is related to the number of years between the retiree’s current age and the life expectancy. For example, someone who is 73 and has a total of $100,000 would divide that amount by the life expectancy factor of 25.6. As a result, that individual would have to withdraw $3,906.25 Before, that factor would have been lower, which would have made each year’s RMD higher.
Seniors who have multiple retirement funds don’t have to take the entire required minimum disbursement from a single account. At the same time, they don’t have to pay on each account. The RMD is based on the total of all accounts. As a result, seniors who have multiple accounts could leave one or more untouched for years as long as they pull the required amount from other accounts.
Why Seniors Must Take RMDs
Many Americans put a portion of their income into tax-deferred retirement accounts. For many, that means regular contributions to either a 401(k) or an IRA. Taxes on these funds are deferred. However, they have to be paid at some point. That’s where the RMD comes in. This withdrawal allows the beneficiary to pay taxes on a fraction of their retirement fund every year, according to AARP.
So, this new change does more than lower the required minimum disbursement. This allows seniors to give less money to the IRS every year. In short, the expanded life expectancy allows seniors to save more money by allowing them to withdraw and pay fewer taxes on their lifelong investments.