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Update to Required Minimum Distributions

February 8, 2022 By Cardinal Point Wealth

While this may not happen often, 2022 brought some GOOD news from the Internal Revenue Service (IRS). The IRS issued new required minimum distribution tables for 2022. A required minimum distribution (RMD) is applicable to qualified tax-deferred investment accounts such as Individual Retirement Accounts (IRAs), 401(k)s, and 403(b)s. Note that Roth IRAs are not included as they are tax-free accounts.

The new RMD distribution tables show that the IRS has lengthened life expectancies. Longer life expectancies lead to increased distribution periods and smaller RMDs. The result is an effective tax cut for high-net-worth individuals who do not need their full RMD. This is good news for those who have brokerage accounts, Roth IRAs, and other sources of income and do not need their annual RMDs to support their lifestyle.

US Tax Laws

Summary and Takeaways

A required minimum distribution (RMD) is applicable to qualified tax-deferred investment accounts. But the IRS recently updated its RMD rules, and published a newly updated chart or table to reflect the changes. In a rare move, these revised rules may mean that some taxpayers will receive what amounts to a significant tax cut. However, tax planning is always best done in consultation with a qualified tax and financial planning expert – and that’s particularly true if you are a cross-border taxpayer. That’s why this article is helpful in providing you current information and insight regarding the important new changes in RMD implemented by the IRS.

Key Takeaways

  • The new RMD tables are based on lengthened life expectancies, which typically lead to increased distribution periods and smaller RMDs.
  • The result is an effective tax cut for high-net-worth individuals who do not need their full RMD to support their lifestyle.
  • Also, by deferring your first RMD you can defer the payment of taxes on that capital distribution, paying them later in your lower-income years.
  • But too large of an RMD could trigger an unwanted outcome by pushing you into a higher tax bracket.
  • That’s especially true if you are a U.S. citizen living in Canada, where such distributions are fully taxable.
  • To strategize for optimum financial outcomes, be sure to seek guidance from a qualified cross-border tax and financial management expert.

At first glance, the IRS seems to have extended life expectancies by two years. For example, according to the old table, the distribution period at age 70 was 27.4, which is now the distribution period at age 72. However, the distribution periods were not actually made two years longer across the board. The distribution period increase at age 72 is 7% (25.6 – 27.4), at age 85 is 8.1% (14.8 – 16), and at age 95 is 3.5% (8.6 – 8.9). After that, the increase is relatively small until age 110 at which time they deviate more drastically.

To calculate your RMD, find the opening account balance for the year and divide that by the distribution period for your age. Make sure your RMD does not fall short because there is a 50% penalty tax on the undistributed amount. Your RMD will get larger as you age and your life expectancy and distribution period decrease.

Current regulations require RMDs to be taken annually, and the first distribution must begin by April 1 in the year after you turn age 72. You do not have to take a distribution in the year you turn 72, but you are required to take a distribution for the year you turn 72. That means you can wait until March 31 in the year you turn age 73 to take your first distribution, but that also means you will have to take two RMDs that year: one for age 72 and one for age 73. After the first year, all distributions must be taken by December 31.

It may be tempting to defer your first RMD so that you can defer the payment of tax. It is prudent to defer the payment of tax unless you can pay a lower rate in low-income years. Doubling your RMD in the year you turn age 73 may not be beneficial though because it may push you into a higher marginal tax bracket. This is particularly true for Americans living in Canada because distributions from IRAs and other qualified accounts are fully taxable in Canada and the Canadian tax brackets are more condensed than the U.S. tax brackets.

Tax planning for U.S. citizens and expats living in Canada can get quite complex and requires the expertise of an advisor who is a Canada-U.S. specialist. Cardinal Point Wealth Management is the industry leader in Canada-U.S. wealth management. We offer comprehensive financial planning, tax planning, and individualized investment management services. Contact us today to discuss how cross-border tax planning and wealth management can be beneficial for you and your loved ones.

2022 IRS Table lll

 Age Distribution Period  Age Distribution Period
70 29.1 93 10.1
71 28.2 94 9.5
72 27.4 95 8.9
73 26.5 96 8.4
74 25.5 97 7.8
75 24.6 98 7.3
76 23.7 99 6.8
77 22.9 100 6.4
78 22 101 6
79 21.1 102 5.6
80 20.2 103 5.2
81 19.4 104 4.9
82 18.5 105 4.6
83 17.7 106 4.3
84 16.8 107 4.1
85 16 108 3.9
86 15.2 109 3.7
87 14.4 110 3.5
88 13.7 111 3.4
89 12.9 112 3.3
90 12.2 113 3.1
91 11.5 114 3
92 10.8 115 and over 2.9

Old IRS Table lll

Age Distribution Period Age Distribution Period
70 27.4 93 9.6
71 26.5 94 9.1
72 25.6 95 8.6
73 24.7 96 8.1
74 23.8 97 7.6
75 22.9 98 7.1
76 22 99 6.7
77 21.2 100 6.3
78 20.3 101 5.9
79 19.5 102 5.5
80 18.7 103 5.2
81 17.9 104 4.9
82 17.1 105 4.5
83 16.3 106 4.2
84 15.5 107 3.9
85 14.8 108 3.7
86 14.1 109 3.4
87 13.4 110 3.1
88 12.7 111 2.9
89 12 112 2.6
90 11.4 113 2.4
91 10.8 114 2.1
92 10.2 115 and over 1.9

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“Cardinal Point” is the brand under which dedicated professionals within Cardinal Point Capital Management, ULC provide financial, tax and investment advisory, risk management, financial planning and tax services to selected clients. Cardinal Point Capital Management, ULC is a US registered investment advisor and a registered portfolio manager in Canada (ON, QC, MB, SK, NS, NB, AB, BC). Advisory services are only offered to clients or prospective clients where Cardinal Point and its representatives are properly registered or exempt from registration. This website is solely for informational purposes. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital.