Stay informed on the new Required Minimum Distributions rules
by Tucker Sandercock – Relationship Manager
Required Minimum Distributions, also known as RMDs, are the IRA’s way to tax the deferred savings built up in retirement accounts such as IRAs and 401Ks. In the eyes of the IRS, these accounts are to be used during a saver’s lifespan rather than to be passed along to the next generation while maintaining their tax-deferral.
The Secure Act 2.0, passed in late 2022, ushered in several important changes to the regulations regarding RMDs. The age at which most savers are required to begin taking distributions has risen from 70 to 73, enabling a few more years of accumulation prior to mandatory withdrawals. The first required distribution can be delayed until April 1st of the following year, but then two withdrawals must be taken in that year to meet requirements. It is also important to remember that distributions are fully taxable as ordinary income the year that they are taken.
The amount of one’s required distribution is calculated by dividing the account’s previous year’s closing balance by a factor published in the appropriate IRS Life Expectancy Table. For most, this percentage gradually increases over time with older age and reduced life expectancy.
Here is an easy-to-use link from Schwab to help you calculate your RMD amount.
Calculate Your RMD - RMD Calculator| Charles Schwab | Charles Schwab
What if one forgets to take a distribution? The IRS also amended these rules in the Secure Act 2.0. The late withdrawal penalty, for distributions in 2023 or after, has been reduced from 50% to 25% of the required amount. This penalty can be reduced to 10% if the missed distribution is taken prior to a listed deadline.
There are some planning opportunities to reduce the tax bite of RMDs, particularly for savers with large balances. The rising annual RMDs may force savers into a higher tax bracket if the account values continue their growth during retirement years. With the rapidly growing Federal deficit, many expect that tax rates will trend higher over time. It may be wise to begin taking withdrawals prior to age 73 so that they are taxed at today’s rates vs the potential for higher rates in the future.
Another strategy to consider is to make a ROTH Conversion prior to mandatory withdrawals beginning. The conversion amount would be taxed at one’s current rate and then could grow and be withdrawn tax-free when needed. Another benefit is that ROTH IRAs are not subject to required distributions.
Finally, another strategy that many clients employ is using their IRAs to fund Qualified Charitable Distributions. The IRS allows for direct charitable distributions from an IRA account up to $100,000.00 each year. These distributions are tax-free and count against one’s RMD obligation.
