Most retirees who withdraw the IRS-required minimum from their retirement savings will be taking out a larger portion of their nest egg this year.
That’s because the IRS formula for withdrawing funds, known as the required minimum distribution, is based on the amount of money in a retiree’s 401(k) or IRA as of Dec. 31, 2021. That was before the S&P 500 stock values declined 24 percent from January through September and the S&P bond index fell 14 percent, shrinking the size of most retirement portfolios.
That’s a tough hit for many Maine retirees, about 351,000 of whom are 60 and older. It is not clear how many of those have 401(k) or IRA plans, but a third rely solely on Social Security for income, according to the Maine Council on Aging. The required minimum distribution on retirement accounts begins when people reach age 72.
In previous stock market slides during the Great Recession in 2007 and early in the COVID-19 pandemic in 2020, Congress waived the required minimum distribution. That’s not likely to happen this year, according to retirement specialists, leaving Maine retirees with less of a cushion amid persistent inflation and threats of a recession.
“Unfortunately, the rules are the rules and there’s very little flexibility on how they are calculated,” said William Enck, a CPA and principal at accounting firm BerryDunn.
Someone who is 75 with an account balance of $100,000 as of Dec. 31, 2021 — half in stocks and half in bonds — would have to withdraw $4,347, Nate Moody, a retirement adviser at Lebel & Harriman Retirement Advisors in Falmouth, estimated.
Figuring in S&P stock and bond market index declines, the account was worth about $80,890 as of Sept. 30. That would mean the $4,347 the retiree would have to withdraw would be 5.4 percent of the account, compared with the 4.37 percent if the markets stayed the same and they still had $100,000.
People who turn 72 in 2022 could have a bit of a reprieve, because they will have until April 1, 2023, to take their withdrawal, Enck said. Retirees could wait until next year to see if the stock market may have recovered some of its losses, minimizing the impact on their savings. That timing is only available the first year a person qualifies under the required minimum distribution. Others must make the withdrawal by the end of 2022.
Tax-deferred simple or SEP IRAs and 401(k) funds are taxable when they are withdrawn. This year, that will mean retirees will take more out of their account and have to pay taxes on that amount, which can be a heavy burden.
The required minimum distribution does not affect tax-free Roth IRAs. Moving some money into a Roth IRA may be one way for retirees to hedge against stock and bond market impact on savings, Moody said, because they will be decreasing their taxable savings by putting the money into tax-free savings.
Another way to ease the burden is to take the distributions several times a year rather than all at once at the end of the year, as most retirees do.
The formula for how much someone must withdraw is based on IRS mortality tables weighed against the amount in the retirement account. So someone expected to live two more years might have to take out 50 percent of their IRA assets each year.
“The IRS is trying to get you to fully liquidate your IRA by the time your life expectancy ends,” Moody said. “It’s not a perfect science.”