Julie Jason: What’s behind RMD numbers?

This follows my column from last week about required minimum distributions (RMDs) returning in 2021 after a waiver in 2020.

If you are wondering whether you are making the right decisions about your retirement account withdrawals, it may help to know what other people do.

A recent survey of members of the American Association of Individual Investors (tinyurl.com/y4l7fbxu) can be a guide. The AAII is a nonprofit that helps individuals manage their assets through research, information and education programs.

Keep in mind that retirement account withdrawals are mandated by law after a certain age (701⁄ if you were

2 born in the first half of 1949 or earlier; 72 if you were born in the second half of 1949 or later). The amount of the withdrawal is determined by a formula that sets the minimum you must withdraw each year to avoid a hefty penalty — a 50 percent excise tax on the amount that should have been withdrawn but was not.

It’s interesting to note that when AAII survey respondents were asked about their withdrawal strategy, the most popular answer (45 percent) was to “simply take the minimum amount required by the tax code.” Two out of five respondents gave their reason for their current strategy as being “a desire to limit withdrawals to what government requires.”

That’s not a surprise, since taking more than the RMD, which is always an option, increases the amount that is reported to the IRS on your Form 1099-R as taxable income. There are some exceptions. For example, Roth IRAs do not trigger an income tax when you withdraw money (nor is the Roth IRA owner subject to RMD requirements for the Roth IRA).

Forty-one percent of survey respondents withdrew only their RMDs, no more. That could be a good strategy, as long as the retiree realizes that he or she should think twice before relying on the RMD to cover living expenses over the years.

If you look at how RMDs are calculated, you’ll understand that the goal of the RMD tables that drive withdrawal calculations is to deplete the IRA over time. That is, the older you are, the higher the percentage withdrawal.

When you are age 75, the RMD divisor is 22.9 (which translates into 4.4 percent). When you are age 85, the divisor is 14.8 (6.8 percent); at age 95, the divisor is 8.6 (11.6 percent); and at age 105, the divisor is 4.5 (22.2 percent). Again, the older you are, the higher the percentage withdrawal.

These divisors are set out in an IRS worksheet at tinyurl.com/nby6fxh, which applies to most people for calculating RMDs. (There is another worksheet that you would use if your spouse is your sole beneficiary of your IRA and he or she is more than 10 years younger than you.)

Let’s see what the divisors might mean to you in dollars.

Say your value on Dec. 31, 2020, is $1 million, and you are age 75. Your 2021 RMD will be $1 million divided by 22.9, or $43,668 (4.4 percent of $1 million).

To see the impact of the divisors over time, assume your IRA 1) does not grow and 2) is reduced each year by the previous year’s RMD.

At age 85, your withdrawal would be just over $39,000, based on your previous year’s value of $579,634. At age 95, your RMD would be about $27,000. At age 105, the RMD would be about $9,400. Again, this shows how RMD percentages work when the IRA has no growth — it also shows you how important it is to invest your IRAs wisely in order to keep the IRAs from depleting over time.

When the AAII survey’s respondents were asked how confident they were about keeping a comfortable lifestyle for the rest of their retirement, 75 percent said they were “very confident,” and 15 percent said “somewhat confident.”

Confidence is good, but make sure it is bolstered by a strong RMD strategy.

Write to me if you’d like to discuss RMDs at readers@juliejason.com.

Julie Jason, JD, LLM, a personal money manager ( Jackson, Grant of Stamford) and author, welcomes your questions/comments (readers@juliejason.com). Her awards include the 2018 Clarion Award, symbolizing excellence in clear, concise communications. Her latest book, a curated collection of Julie’s columns, is “Retire Securely: Insights on Money Management From an Award-Winning Financial Columnist.” To hear Julie speak, visit juliejason.com/events.