RMDs – A New Year with New Rules
Let’s start with a reminder of what a Required Minimum Distribution (RMD) is:
A required minimum distribution (RMD) is the amount of money that must be withdrawn from an employer-sponsored retirement plan, traditional IRA, SEP, or SIMPLE individual retirement account (IRA) by owners and qualified retirement plan participants of retirement age.1
The main question here is What is considered ‘retirement age’? The answer to that is one of the main focal points of legislation signed into law at the end of 2023 called Secure 2.0. And really, this may not be the most accurate definition because if you have an Inherited IRA, you don’t have to be retired to be required to take distributions. Nevertheless, the bottom line is that RMDs are mandatory and you need to know the rules.
To help with this, we have created two tools to help you find your footing. The first is to find your start date for an IRA or even a qualified retirement plan in certain cases. The second is a chart to guide you on an inherited IRA.
But…STOP! This next part is important.
If you look at these tools and find out you can delay taking any distributions, it doesn’t mean you need to delay! We are living in interesting times. Interest rates are higher than they have been in years and climbing, there is a bear market, and the current tax environment is set to sunset in 2026 leaving us with higher taxes. What does all of that mean?
When you take a distribution from a pre-tax account like an IRA or 401(k), it is taxable income. Which means you could pay more tax if the distribution is higher or tax rates go up. So, let’s look at the markets, where they are now and where will they be when you need to take a distribution.
Historically speaking, when bear markets bottom out between 20 & 30%, the average return in the following 12 months was 39%.2 We know history is not guaranteed to repeat itself, but it does provide us a foundation for decision making.
Our recommendation is to get some help and don’t wait. We are in a bear market now!
Here are some conversation starters….
- Roth conversions in a down market—converting IRA dollars to Roth IRA dollars, which is converting pre-tax dollars to after-tax dollars.
- Qualified Longevity Annuity Contracts—Secure 2.0 changed the amount of IRA money you can contribute to one of these contracts and delay an RMD. The maximum contribution amount is now $200,000. Additionally, interest rates are climbing which makes these vehicles look more and more attractive.
- Qualified Charitable Distributions (QCD)—If you are over 70 ½, you can send $100,000 directly from an IRA to a charity and it doesn’t even hit your tax return. Secure 2.0 allowed for this amount to start keeping up with inflation in 2024.
- Stretch Your IRA—The law to stretch an IRA over the lifetime of your beneficiary when you die is dead, but there is a workaround. Now you can make a one-time contribution using the QCD strategy of $50,000 to a Charitable Remainder Trust. This could allow you to name your children and in some cases your grandchildren lifetime income beneficiaries. This one-time gift added in Secure 2.0 also allows for gifts to a Charitable Gift Annuity. And both of these strategies are looking better and better as interest rates rise.
- Structure you Inherited IRA—Remember we are in a progressive tax system. If you wait to take distributions, you could see almost half of your Inherited IRA disappear. There are many ways you could possibly structure these distributions and lower your lifetime tax bill, but you can’t wait to do it—especially with the opportunity of a bear market.
So back to what you need to know about when you need to start your RMD. Here are the two tools we promised.
This is certainly a year in which you cannot procrastinate. You might be kicking yourself if you do. Call us today and let us help you navigate your Required Minimum Distribution.