Cicadas go through different stages of metamorphosis in their life span. As the cicadas go through their lives a series of changes takes place and their appearance changes.
Traditional TSP, IRA, 401k, and other qualified retirement plans also undergo stages. There is the accumulation stage and then the distribution stage. The good news is that the distribution stage for a retirement plan can last much longer than the mature cicada stage.
Recently at a retirement presentation, someone expressed concern about the possibility of his Thrift Savings Plan (TSP) account’s future required minimum distributions (RMDs) being responsible for depleting the account in a few years.
Required Minimum Distributions
RMDs are the minimum amounts you must withdraw from your retirement accounts each year. You generally must start taking withdrawals from your traditional TSP, IRA, 401k, and other qualified retirement plan accounts when you reach age 73.
Beginning in 2023, the SECURE 2.0 Act raised the age that you must begin taking RMDs from age 72 to age 73. Then, starting in 2033, SECURE 2.0 again pushes the age at which RMDs must start to 75.
You must start withdrawing your RMD by the first of April after you turn 73 years old. You must calculate and withdraw the correct RMD every year after that, or face a penalty from the Internal Revenue Service. See “Retirement Plan and IRA Required Minimum Distributions FAQs.”
Example
Here’s an example. John, a retirement account holder, turned 73 on Oct. 1. His TSP was worth $500,000 on Dec. 31 of the prior year. To calculate the annual amount to be withdrawn, that prior Dec. 31 balance is divided by the distribution factor from the relevant IRS table.
John would divide $500,000 by 26.5, which is the distribution period from the latest Uniform Lifetime Table for a 73-year-old. See the table below.
Uniform Lifetime Table
| Age | Distribution Period | Age | Distribution Period | ||
| 72 | 27.4 | 97 | 7.8 | ||
| 73 | 26.5 | 98 | 7.3 | ||
| 74 | 25.5 | 99 | 6.8 | ||
| 75 | 24.6 | 100 | 6.4 | ||
| 76 | 23.7 | 101 | 6 | ||
| 77 | 22.9 | 102 | 5.6 | ||
| 78 | 22 | 103 | 5.2 | ||
| 79 | 21.1 | 104 | 4.9 | ||
| 80 | 20.2 | 105 | 4.6 | ||
| 81 | 19.4 | 106 | 4.3 | ||
| 82 | 18.5 | 107 | 4.1 | ||
| 83 | 17.7 | 108 | 3.9 | ||
| 84 | 16.8 | 109 | 3.7 | ||
| 85 | 16 | 110 | 3.5 | ||
| 86 | 15.2 | 111 | 3.4 | ||
| 87 | 14.4 | 112 | 3.3 | ||
| 88 | 13.7 | 113 | 3.1 | ||
| 89 | 12.9 | 114 | 3 | ||
| 90 | 12.2 | 115 | 2.9 | ||
| 91 | 11.5 | 116 | 2.8 | ||
| 92 | 10.8 | 117 | 2.7 | ||
| 93 | 10.1 | 118 | 2.5 | ||
| 94 | 9.5 | 119 | 2.3 | ||
| 95 | 8.9 | 120 and over | 2 | ||
| 96 | 8.4 | ||||
Using the table for John, we can agree his RMD is $18,868.
RMD = $500,000 divided by 25.6 = $18,868
The RMD rules guarantee individuals cannot accumulate retirement accounts as a form of inheritance for others. The RMD rule is in place to prevent individuals from avoiding the deferred tax liability owed on their retirement contributions and earnings.
The federal government allows you to postpone paying taxes on your retirement savings to allow you to use those savings for retirement years. RMDs are how the government ensures you will have to start taking distributions and be taxed while you are still alive.
But should John worry about future RMDs depleting his retirement account if he is blessed with a long life?
Can RMDs Potentially Deplete Your Retirement Account?
I mined the Internet to provide you with a good illustration of why this should not be a concern. I came across an article written in 2020 that should help you better understand how to think about this uncertainty.
Mark Wilson, a Certified Financial Planner®, updated the table he created for Sarah O’Brien’s CNBC article, Here’s how changes to required minimum withdrawals may affect your retirement account.
What I wanted was a simple way to convey how your retirement account continues to grow throughout its duration. Mark used a 5% annual growth rate in the article and his updated illustration is below.
Required Minimum Distributions (RMDs) from Retirement Accounts
| Age | Beginning Balance | RMD | 5% Annual Growth | Ending Balance |
|---|---|---|---|---|
| 73 | 500,000 | (18,868) | 24,057 | 505,189 |
| 75 | 509,646 | (20,717) | 24,446 | 513,375 |
| 80 | 519,743 | (25,730) | 24,701 | 518,714 |
| 85 | 501,948 | (31,372) | 23,529 | 494,105 |
| 90 | 446,482 | (36,597) | 20,494 | 430,379 |
| 95 | 349,396 | (39,258) | 15,507 | 325,645 |
Some of us may see the first projected RMD payments in the future from our TSP or other retirement accounts and panic. Remember, although you are not adding future dollars to the retirement plan you will have the benefit of your investments’ growth that changes the balance in the account.
RMDs in the illustration are not going to deplete John’s retirement savings. The future for John is if he withdrawals just the RMD requirements each year he will have:
- a larger RMD each year to offset inflation and higher expenses
- remaining investments that can be tapped if needed
- remaining investments that can be shared with his survivors
To be sure, Mark’s selection of a 5% annual return is not guaranteed. Being able to achieve a 5% annual return on your own may sound easy but you have to understand the sequence of return risk you may be signing up for. If you want a guaranteed source of income then you may want to explore an annuity.
If someone has other sources of income after a career, such as a military retirement, that might even make the need for income from their retirement account not needed. However, the retirement account will generate RMD income and start providing streams of income at their required RMD starting date and it can last a long time.
In Sarah O’Brien’s article, she shared that Ed Slott, the CPA and IRA guru noted, “The only people who take just the minimum are the ones who don’t need the money.” If you don’t take your RMDs, you will have to pay an excise tax to the IRS equal to 25% of the amount not withdrawn.
If you don’t need the RMD distribution there are a variety of ways to invest it and gift it, but that is another article.
