Retirement planning is a complex puzzle, and one important piece of that puzzle is understanding Required Minimum Distributions (RMDs).
Many Americans may not be aware of the requirement to initiate withdrawals from their retirement accounts in their early 70s - and to pay income taxes on these funds. This requirement serves as the government's means of finally collecting taxes on retirement savings that have been growing tax-deferred for several decades.
The original age for initiating RMDs was 70 1/2, but the Secure Act 1.0 law, implemented in 2019, extended this threshold to 72. It was increased again in 2022 through Secure Act 2.0 and now stands at 73. In this blog post, we will explore RMDs and how a fiduciary advisor can help you navigate this crucial aspect of retirement planning. Here’s what you need to know.
A required minimum distribution (RMD) is the mandated amount of money that individuals who own or participate in employer-sponsored retirement plans must withdraw once they reach retirement age. These tax-advantaged accounts typically include Traditional IRAs, 401(k)s, 403(b)s, and similar retirement savings accounts.
The main purpose of RMDs by the Internal Revenue Service (IRS) is to help ensure that retirees do not indefinitely accumulate tax-advantaged retirement savings without contributing taxes on the accumulated wealth.
Individuals with retirement accounts must initiate withdrawals from their retirement savings by April 1 of the year following the one in which they turn 73. It's important to note that the exact age at which you must begin your RMDs can vary based on factors such as your specific retirement plan and birthdate. Now that we know about RMDs, let's learn how you calculate them.
Calculating your RMD is essential to avoid penalties and confirm compliance with IRS regulations. The RMD calculation is based on your account balance and life expectancy. You can use the IRS's Uniform Lifetime Table to determine your RMD.
To calculate your RMD for the year, divide your account balance as of December 31st of the previous year by your life expectancy factor from the table. The resulting figure represents the minimum amount you must withdraw for that year. In 2023, the RMD calculation relies on the IRS's widely used Uniform Lifetime Table.
So, who needs to take a required minimum distribution in 2023? If you were born in 1951, you use age 73 to start taking RMDs because age 73 applies to anybody who turns 72 in 2023 or later. If you were born in 1950 or earlier, you stick on your old schedule. So, if you turned 72 last year, you still have to take RMDs this year. If you turned 72 in 2023, your first distribution year is when you turn 73 next year in 2024, which means your required beginning date won’t be until April 1, 2025.
It's worth mentioning that the IRS provides additional tables for account holders and beneficiaries whose spouses are significantly younger, as this can influence the distribution requirements.
Understanding your RMD tax implications is paramount when planning your retirement withdrawals. RMDs are typically treated as ordinary income, which means they are subject to income tax. It's important to be mindful of these tax considerations to make informed decisions about managing your retirement funds.
When handling the taxes on your RMDs, you can opt to have taxes withheld directly from your RMD distribution. This helps to ensure that the appropriate amount is set aside to cover your tax liability. Alternatively, you can pay the taxes separately when you file your annual tax return. It's worth noting that despite the importance of complying with RMD requirements, it's not uncommon for individuals to make mistakes.
Historically, the Tax Code included a hefty 50% penalty for failing to take the required RMD, which was calculated based on the amount that should have been withdrawn but wasn't. However, with the enactment of SECURE Act 2.0, this penalty has been reduced to 25% and can further decrease to 10% if the missed RMD is fixed.
If you have questions about tax-efficient strategies for RMDs, it's best to consult a fiduciary advisor. Fiduciaries can help you make well-informed decisions regarding your RMDs and compliance with IRS regulations while optimizing your financial outcomes in retirement.
Proper asset allocation is crucial in retirement, especially when you rely on RMDs as part of your retirement income. If your investments are too aggressive or conservative, it can impact your ability to sustain your retirement lifestyle. A well-diversified portfolio that matches your risk tolerance and income needs is essential.
Periodically review your asset allocation and consider adjusting it as you age to reduce risk. A fiduciary advisor can help you make informed decisions and help your investments align with your RMD requirements and long-term goals.
Beneficiary designations for retirement accounts can significantly impact the distribution of your assets after your passing. Unlike other accounts, retirement accounts have specific rules that govern how they pass to beneficiaries. It's crucial to keep your beneficiary designations current and understand the implications for your heirs.
For example, spouses have unique options, such as the ability to roll over an inherited IRA into their own IRA. In contrast, non-spouse beneficiaries typically have to take distributions based on their life expectancy. Consult with a fiduciary advisor to help ensure your beneficiary designations align with your estate planning goals.
Navigating the complexities of RMDs and retirement planning can be challenging, but a fiduciary can be a valuable resource for getting it right. At NJM Wealth Preservation Strategies, we understand that each individual’s financial situation is unique.
Owner / Operator Nic J. McLeod and his dedicated team operate by a code of ethics that proudly offers you knowledgeable, honest financial advice - as we believe you deserve nothing less. Whether you need help with RMD calculations, adjusting your investment portfolio, or even help with your estate planning, our seasoned advisors are here to address your specific monetary concerns.
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. When you choose to work with us, you can trust your guidance is from a dependable professional. No matter your financial goals, we’re here to help you reach them.
With the retirement planning changes coming in 2024, many retirees who have hit RMD age may feel under pressure this year. But with the right support and educated guidance, you can maximize your retirement savings while complying with IRS regulations. The best way to do so is to consult a professional.
To learn opportunities to plan your RMDs and maximize your tax efficiency, schedule a call with us here today