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RMDs

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By Michael Christodoulou

You may spend decades contributing to various retirement accounts. But for some accounts, such as a traditional IRA and 401(k), you must start withdrawing funds at a certain point. What should you know about this requirement?

To begin with, the rules governing these withdrawals — technically called required minimum distributions, or RMDs — have changed recently. For many years, individuals had to begin taking their RMDs (which are based on the account balance and the IRS’ life expectancy factor) when they turned 70½. 

The original SECURE Act of 2019 raised this age to 72, and SECURE 2.0, passed in 2022, raised it again, to 73. (If you turned 73 in 2023, and you were 72 in 2022 when the RMD limit was still 72, you should have taken your first RMD for 2022 by April 1 of this year. You will then need to take your 2023 RMD by Dec. 31. And going forward, you’ll also need to take your RMDs by the end of every year.) 

Not all retirement accounts are subject to RMDs. They aren’t required for a Roth IRA, and, starting in 2024, won’t be required for a Roth 401(k) or 403(b) plan. But if your account does call for RMDs, you do need to take them, because if you don’t, you could face tax penalties. Previously, this penalty was 50% of the amount you were supposed to have taken, but SECURE 2.0 reduced it to 25%.

When you take your RMDs, you need to be aware of a key issue: taxes. RMDs are taxed as ordinary income, and, as such, they could potentially bump you into a higher tax bracket and possibly even increase your Medicare premiums, which are determined by your modified adjusted gross income. 

Are there any ways you could possibly reduce an RMD-related tax hike? You might have some options. Here are two to consider:

• Convert tax-deferred accounts to Roth IRA. You could convert some, or maybe all, of your tax-deferred retirement accounts to a Roth IRA. By doing so, you could lower your RMDs in the future — while adding funds to an account you’re never required to touch. So, if you don’t really need all the money to live on, you could include the remainder of the Roth IRA in your estate plans, providing an initially tax-free inheritance to your loved ones. However, converting a tax-deferred account to a Roth IRA will generate taxes in the year of conversion, so you’d need the money available to pay this tax bill. 

• Donate RMDs to charity. In what’s known as a qualified charitable distribution, you can move up to $100,000 of your RMDs directly from a traditional IRA to a qualified charity, avoiding the taxes that might otherwise result if you took the RMDs yourself. After 2023, the $100,000 limit will be indexed to inflation.

Of course, before you start either a Roth IRA conversion or a qualified charitable distribution, you will need to consult with your tax advisor, as both these moves have issues you must consider and may not be appropriate for your situation.

But it’s always a good idea to know as much as you can about the various aspects of RMDs — they could play a big part in your retirement income strategy.  

Michael Christodoulou, ChFC®, AAMS®, CRPC®, CRPS® is a Financial Advisor for Edward Jones in Stony Brook. Member SIPC.

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By Michael Christodoulou

When you’re working, you may spend decades contributing to retirement accounts such as your 401(k) and IRA. Once you’re retired, though, you’ll likely need to begin withdrawing from these accounts to help pay for your living expenses. In fact, you’ll be required to take money from them at a certain age — but that age requirement is changing, and it could lead to changes in your financial strategy.

Let’s look at some background behind this development. You put in pre-tax dollars to a traditional IRA and 401(k), so your contributions can lower your taxable income and your earnings can grow on a tax-deferred basis. Eventually, though, you must take withdrawals from these accounts or face tax penalties. (A Roth IRA does not have the withdrawal requirement; you can essentially keep the money intact as long as you choose.) 

As part of the SECURE Act 2.0 of 2022, the age at which you must take these withdrawals — technically called required minimum distributions, or RMDs — has increased from 72 to 73. So, if you turn 72 in 2023, you now have another year before you’re required to take RMDs.

The SECURE Act 2.0 also mandates that, in 2033, the RMD age will increase again — to 75 — so, depending on your current age, you may have even more time to plan for the effects of RMDs. Of course, you may need to start taking withdrawals from your retirement accounts before you reach either RMD age — 73 or 75 — so the additional time may not mean much to you. But if you can afford to wait until you must start taking RMDs, what issues should you consider?

Perhaps the most important one is taxes. Your RMDs, which are based on your life expectancy and account balances, are considered taxable income in the year in which you accept the money. If you have sizable amounts in your traditional IRA and 401(k), these RMDs could be large enough to bump you into a higher tax bracket, leading to greater taxation of Social Security benefits and a Medicare surcharge. So, the ability to delay taking RMDs can be beneficial from a tax standpoint, at least for a time. On the other hand, by delaying RMDs, you might eventually have to take bigger taxable withdrawals from your accounts that may have larger balances because they’ve had more time to potentially grow.

You could address the issue of taxable withdrawals by converting your traditional IRA to a Roth IRA before you’re faced with RMDs — and now, you have more time to do so. Roth IRAs have no RMDs, and since a Roth IRA is funded with after-tax dollars, your withdrawals are tax free, provided you don’t begin taking them until you’re at least 59½ and you’ve had your account at least five years. Again, though, taxes are the issue — any pre-tax dollars you convert from a traditional IRA to a Roth IRA will be taxable in the year of the conversion. To reduce this tax hit, you could space out the conversion over several years.

When thinking about delaying RMDs or doing a Roth IRA conversion to avoid RMDs, you’ll need to consult with your tax advisor. But the new RMD age limits do give you more flexibility in these areas, so think carefully about how you might benefit from the added time.

Michael Christodoulou, ChFC®, AAMS®, CRPC®, CRPS® is a Financial Advisor for Edward Jones in Stony Brook. Member SIPC.

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By Michael Christodoulou

If you’re a certain age, you’ll need to withdraw money from some of your retirement accounts each year. But in 2022, the amount you must take out may be changing more than in other years — and that could affect your retirement income strategy.

Here’s some background: Once you turn 72, you generally must start taking withdrawals, called required minimum distributions, or RMDs, from some of your retirement accounts, such as your traditional IRA and your 401(k) or similar employer-sponsored plan. Each year, your RMDs are determined by your age and account balances. This year, the life expectancy tables used by the IRS are being updated to reflect longer lifespans. This may result in lower annual RMDs than you’d have to take if this adjustment hadn’t been made.

If you’ve started taking RMDs, what does this change mean to you? It can be a positive development for a few reasons:

Potentially lower taxes: Your RMDs are generally taxable at your personal income tax rate, so the lower your RMDs, the lower your tax bill might be.

Possibly longer “lifespan” for retirement accounts: Because your RMDs will be lower, the accounts from which they’re issued — including your traditional IRA and 401(k) — may be able to last longer without becoming depleted. The longer these accounts can stay intact and remain an asset, the better for you.

More flexibility in planning for retirement income: The word “required” in the phrase “required minimum distributions” means exactly what it sounds like — you must take at least that amount. If you withdraw less than your RMD, the amount not withdrawn will be taxed at 50%. So, in one sense, your RMDs take away some of your freedom in managing your retirement income. But now, with the lower RMDs in place, you may regain some of this flexibility. (And keep in mind that you’re always free to withdraw more than the RMDs.)

Of course, if you don’t really need all the money from RMDs, even the lower amount may be an issue for you — as mentioned above, RMDs are generally taxable. However, if you’re 70½ or older, you can transfer up to $100,000 per year from a traditional IRA directly to a qualified charitable organization, and some, or perhaps all, of this money may come from your RMDs. By making this move, you can exclude the RMDs from your taxable income. Before taking this action, though, you’ll want to consult with your tax advisor.

Here are a couple of final points to keep in mind. First, not all your retirement accounts are subject to RMDs­ — you can generally keep your Roth IRA intact for as long as you want. However, your Roth 401(k) is generally subject to RMDs. If you’re still working past 72, though, you may be able to avoid taking RMDs from your current employer’s 401(k) or similar plan, though you’ll still have to take them from your traditional IRA.

Changes to the RMD rules don’t happen too often. By being aware of how these new, lower RMDs can benefit you, and becoming familiar with all aspects of RMDs, you may be able to strengthen your overall retirement income situation.

Michael Christodoulou, ChFC®, AAMS®, CRPC®, CRPS® is a Financial Advisor for Edward Jones in Stony Brook. Member SIPC.

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