Smaller IRS required withdrawal amounts to start next year

Typically, once you reach age 72 (age 70½ for those born before July 1, 1949), you must start taking withdrawals from your traditional IRA and tax-deferred retirement plan — even if you don't need the money. For some, these required minimum distributions (RMDs) could be more money than they'd prefer to withdraw. If you ever wished you didn't have to withdraw so much each year from these accounts, your wish will soon be granted.

What is changing and why
Recognizing that people are living longer, the IRS revised its life expectancy tables used to calculate RMDs for older workers and retirees starting in 2022. The change, the first since 2002, will reduce your RMD amounts and allow more of your money to remain growing in your tax-deferred account, if you choose.

Take, for example, a 72-year-old with $400,000 in a traditional IRA. Under the current IRS tables, the individual would calculate their RMD based on a life expectancy of 25.6 years, requiring them to withdraw $15,625 for the year. Using the new formula, their life expectancy would be 27.4 years, putting their annual RMD at $14,599 — or $1,026 less. (The updated tables have been published in the Federal Register.)

RMDs are Uncle Sam's way of finally collecting ordinary income tax on money that's been sitting tax-deferred for possibly decades in traditional IRAs and 457, 401, and 403(b) retirement plans. (Roth IRAs don't have RMDs.) Account owners born July 1, 1949, or later must start RMDs after turning age 72 (age 70½ for those born earlier).

You can, of course, withdraw more from retirement accounts than the mandated RMD, and many people do so. But failing to take the minimum distribution leads to a stiff penalty — 50% of the amount you should have withdrawn but didn't.

Don't forget your 2021 distribution
Congress waived 2020 RMDs because of the COVID-19 pandemic that initially sent the markets in a downward spiral. But RMDs are back for 2021. If you haven't taken your RMD yet for this year, you'll need to do so by Dec. 31, 2021.

Also, you'll have to use the old tables to calculate your 2021 distribution; the new tables are strictly for withdrawals for 2022 and later.