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Following a banner year in the stock market, investors subject to required minimum distributions could be in for a nasty tax surprise, Ed Slott says.
00:00 Introduction
00:16 Required Minimum Distributions
04:45 Larger-Than-Expected RMDs in 2024
10:46 Tax Implications of Required Minimum Distributions
12:35 Can Converting to a Roth Reduce Future RMDs?
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As retirement planning becomes more complicated with changing regulations and market conditions, retirees and soon-to-be retirees must brace themselves for the possibility of higher required minimum distributions (RMDs) in 2024.
RMDs are mandatory withdrawals that individuals must take from their retirement accounts after reaching a certain age, typically starting at age 70 ½ or 72, depending on when the individual was born. These withdrawals are subject to income tax and failure to take them can result in steep penalties.
The Internal Revenue Service (IRS) determines the amount individuals must withdraw each year based on their life expectancy and the total value of their retirement accounts. Despite the recent economic downturn caused by the COVID-19 pandemic, the stock market has rebounded and retirement account balances have largely recovered. As a result, many retirees may see an increase in the value of their retirement accounts, leading to higher RMDs in the future.
Additionally, changes to tax laws and regulations could also impact RMDs in 2024. With the passage of the SECURE Act in December 2019, the age at which individuals must begin taking RMDs was raised from 70 ½ to 72 for those who turned 70 ½ after January 1, 2020. This change could result in larger RMDs for individuals reaching this age in 2024 and beyond.
To prepare for higher RMDs in 2024, retirees should consider working with a financial advisor to reassess their retirement income needs and develop a withdrawal strategy that minimizes taxes and maximizes income. By carefully planning ahead, retirees can ensure that they are financially prepared for the higher RMDs that may be coming their way.
In conclusion, retirees and soon-to-be retirees should be aware of the potential for higher RMDs in 2024 and take proactive steps to adjust their retirement planning accordingly. By staying informed and working with a financial advisor, individuals can navigate the complex world of RMDs and ensure a secure and comfortable retirement.
My tax professor said look at total return, not just tax avoidance. In general you are always better off to delay withdrawing tax sheltered retirement funds. This usually means taking the minimum withdrawal so the balance can earn tax free. The idea of having withholding on your withdrawals is a good simplifyer
very helpful ! Thank you !
Excellent segment. Thanks.
What is the problem with taking money out of your IRA. I am 68 and have been taking money out of mine since the early withdrawal penalty stopped at age 59 1/2. The money is for spending in your retirement. Not to leave in there until you die. You have been paying income tax your whole life. So you have to pay some taxes out of your withdrawals. You are probably going to be in lo lower tax bracket then you had real income anyway.
My RMD totally goes straight to a charity so I don’t incur any taxes on this withdrawal. I take it out in the first two months of the year and it’s all over for the year. Works great for me.
I think one potential approach to take would be to buy fixed income securities at a level that would more than cover the projected RMD that would mature inside the taxdeferred account and maybe have it continue to earn interest until December 1st or so. Then take the RMD from that cash, take 20% withholding from it, and that withholding will cover the tax obligations for the year.
For example, if your first RMD is at age 73, buy TIPS five or ten years in advance that would mature that year and in sufficient quantity to cover your estimated taxes. You’ll have all the principal available as well as the interest collecting during that time. This would free you from having to sell a stock or fund that might be depressed that year.
The other strategy to take would be to try to convert a great deal of your tax-deferred accounts (TDA) to a Roth IRA, but not necessarily all of them. The TDAs can still be useful for funding deductible expenses like long term care that’s not covered by Medicare.
Fidelity informs me of my RMD obligations and I choose to withhold the required taxes. Easy.
I will happily pay the taxes on money I am blessed to not need if I am lucky enough to live to 75+ when the RMDs kick in.
One way to reduce your RMD tax liability is a QCD (Qualified Charitable Contribution) which counts toward the RMD.
I am doing QCDs.
Well, if you have a couple of bucks and start your RMD, just be aware of IRMMA!!!!! that is a hidden financial bite that will hit your pocket via SSI.
If the value of your tax-deferred accounts goes down, your RMD can be less than the previous year.
My yearly process is to take my RMD on Feb 1st. I take only what the RMD amount is, and I have withholding taken out. Then I reinvest the RMD to create as much income as possible to offset the tax being paid on the RMD. My accountant also provides the 4 estimated tax payments to be made during the year taking everything into consideration. This system works well for me.
My RMDs start at age 75. I am taking monies out each year before then. I am 63. I just trying to make sure I stay under IRMAA when I am 65.
If the value of your investment /pension accounts DIDN'T rise last year, to get back to pre-2020 levels, you were a lousy investor and it would be a bigger problem.
Getting more money as your RMD and paying taxes FROM the increase shouldn't be a surprise- unless you are lazy. Every company holding an IRA or 401k lets you know in January what it will be for the nexfuture increases t year – while you are still preparing the previous year's tax return! That means you can plug in already-calculated RMD and see the tax effect A YEAR BEFORE the higher bill comes due. (Estimated payments are based on the previous year's return). Just add half the rate of inflation to your social security payment and any decent tax software, will show you next year's approximate total tax payment.
Put whatever you don't need of the RMD into a brokerage account, and if your retirement accoutas are well thought out, it will rise as fast as they do. A non-retirement account doesn't have RMDs future RMDS, and LTCG are taxed at lower rates when you do draw from them.
"Pay a little now or pay a lot more later" Old oil filter advertisement slogan but appropriate for someone who has the option of doing Roth IRA or 401/457 contributions — probably better than "traditional"
remember the further tiers of IRMAA "medicare" penalties are egregious and also RMD might push any Social Security Retirement income into 85% taxation if not there already
also married people need beware of the "widow's" or "widower's" penalty (losing the joint filing favorable taxation treatment)
I wonder if at some point of tax bracket or income levels if the "tax bomb" tax deferred accounts ever become inferior to just plain taxable investment,brokerage,or savings accounts ?