GDA Action October 2021

16 • October 2021 FINDINGSUCCESS Helping you achieve personal and professional growth. RMDs 101 By Ainsley Carbone, Total Wealth Strategist Americas, UBS FS; Justin Waring, Investment Strategist Americas, UBS FS; and Daniel J. Scansaroli, Head Portfolio Strategy Americas, UBS FS The IRS is happy to allow you to defer some of your income taxes, but still wants you to pay those taxes at some point during your lifetime. As much as we would like to defer those taxes forever, the IRS has another plan: required minimum distributions (RMDs). The IRS uses RMDs to require you to withdraw a portion of your retirement account every year, and to pay taxes on your tax-deferred Traditional IRA and 401(k) assets, for the rest of your life. Roth IRAs are not subject to lifetime RMDs, but Roth 401(k)s are. When do I need to take my first RMD? You must take your first RMD by April 1 of the year following the year you reach age 72. For every subsequent year, you need to take the RMD by December 31. Delaying your first RMD until April 1 doesn’t dismiss you from the first year’s requirement—if you use the first year’s grace period, you’ll have to take two RMDs in one calendar year. For instance, if you turn age 72 in 2022 and delay your first RMD until April 1 2023, you’ll need to take two distributions in 2023—one by April 1 2023 to satisfy 2022’s requirement, and one by December 31 2023 to satisfy 2023’s RMD. RMDs are included in taxable income, so taking two RMDs in one year could result in a higher tax cost, especially if you have substantial IRA assets or if you’re at an income level close to the upper end of your tax bracket. The “still working” 401(k) exception: If you have an employer- sponsored retirement plan, like a 401(k), and you’re still working for that employer after age 72, your Traditional and Roth 401(k) plan assets will generally not be subject to RMDs. As long as you don’t own more than 5% of the company where you work, you may be able to delay taking RMDs from that company’s plan until April 1 following the year that you retire. If your plan allows for it, you may be able to roll your Traditional IRA assets into your employer’s 401(k) plan, which could allow you to delay RMDs on those dollars, too. You’ll still need to take RMDs for any applicable retirement assets outside your employer’s plan. How are my RMDs calculated? The good news is that you won’t need to calculate your own RMDs. Financial institutions are required to either automatically provide the amount of your RMD or to inform you that an RMD is due and offer to furnish your RMD upon request. Even so, it can be helpful to understand the basis of the calculation. In principle, the IRS hopes to be able to tax all of your tax-deferred assets by the end of your life, but is okay letting you spread your RMDs across your retirement years. To align the longevity of your retirement account with your expected longevity, the IRS uses a concept called the “Distribution Period.” Your Distribution Period is the number of additional years that you and your spouse are expected to live, using the IRS tables described below. If you are single, the IRS will treat you as married—with a hypothetical spouse 10 years younger than you—for the purpose of this calculation. For most IRA owners, your Distribution Period will be based on the IRS’s Uniform Lifetime Table (see the end of this report). However, if one spouse is more than 10 years younger than the other, you will find your Distribution Period by looking up your age and your spouse’s age in the IRS’s Joint Life and Last Survivor Table; one younger spouse leads to a longer joint life expectancy, a longer Distribution Period, and therefore smaller RMDs. Each year, you’ll divide your account balance (as of December 31 of the prior year) by your Distribution Period—the result is your RMD for that year. Life expectancy tables for RMDs are updated periodically. For example, in November 2020 the IRS issued final regulations containing new life expectancy tables that will be effective for RMDs beginning January 1 2022. is due and offer to furnish your RMD upon request. Even so, it can be helpful to understand the basis of the calculation. In principle, the IRS hopes t be able to tax all of your tax-deferred assets by the end of y ur life, but is okay l tting you spread your RMDs across your retirement year . To align the longevity of your r tirement account with your expected long vity, the IRS uses a concept called the "Distrib tion period." Your Distribution period is the number of additional years that you and your spouse are expected to live, using the IRS tables described below. If you are single, the IRS will treat you as married—with a hypothetical spouse 10 years younger than you—for the purpose of this calculation. For most IRA owners, your Distribution period will be based on the IRS's Uniform Lifetime Table (see the end of this report). However, if one spouse is more than 10 years younger than the other, y u will find your Distribution period by looking up your age and y ur spouse's age in the IRS's Joint Life and Last Survivor Table; one younger spouse leads to a longer joint life expectancy, a longer Dist ibution perio , and therefore sm ller RMD . Each year, you'll divide your account balance (as of 31 December of the prior year) by your Distribution period, and the result is your RMD for that year. Life expectancy tables for RMDs are updated periodically. For example, in Novemb r 2020 the IRS issued final regul ions containing new life expectancy tables that will effective for RMD beginning 1 January 2022 . H w will this update impact RMDs? The new tables account for recent improvements in life expectancy, resulting in slightly larger Distribution periods (and lower RMDs). For example, in 2021, a 72 year old would divide her IRA balance by 25.6 years (the Distribution period)—which translates to about 3.91% of her balance—in 2021. For someone else, turning 72 in 2022, their Distribution period would be 27.4 years, resulting in a 3.65% RMD. Longer life expectancies lead to slightly smaller RMDs Required minimum distributions (RMDs), by age, as a % of Traditional IRA balance Source: IRS, UBS. Blog is due and offer to furnish your RMD upon request. Even so, it can be helpful to understand the basis of the calculation. In principle, the IRS hopes to be able to tax all of your tax-deferred assets by the end of your life, but is okay letting you spread your RMDs across your retir ment yea s. To align the longevity f your retirement accou t with your expected longevity, the IRS uses a concept called the "Distribution period." Your Distribution period is the number of additional years that you and your spouse are expected to live, using the IRS t bles describe b low. If you are single, the IRS will treat you as married—with a hypothetical spouse 10 ea s young r han you—for the purpose of thi calculation. For most IRA own rs, your Distri uti n period will be based on the IRS's Unif rm Lifetime Table (see the end of this report). Ho ever, if on spouse is more than 10 years younger than the other, you will find your Distribution period by looking up your age and your spouse's ge in the IRS's Joint Life and Last Survivor Table; one younger spouse leads to a longer joint life expectancy, a longer Distribution period, and therefore smaller RMDs. Each year, you'll divide your accou t balance (as of 31 December of the prior y ar) by y ur Distribution p riod, and the result is your RMD for that ye r. Life expectancy tables for RMDs are updated periodically. For example, in November 2020 the IRS issued final regulations containing new life expectancy tables that will be effective for RMDs beginning 1 January 2022 . How will this update impact RMDs? The new tables account for recent improvements in life expectancy, resulting in slightly larger Distribution periods (and lower RMDs). For example, in 2021, a 72 year old would divide her IRA balance by 25.6 years (the Distribution period)—which translates to about 3.91% of her balan e—in 2021. For someone else, turning 72 in 202 , their Distribution period would be 27.4 years, resulting in a 3.65% RMD. Longer life expectancies lead to slightly smaller RMDs Required minimum distributions (RMDs), by age, as a % of Traditional IRA balance Source: IRS, UBS. Blog