As financial advisors, we’re used to all the nuances and choices that retirees face when it comes to when and how to take their Required Minimum Distribution (RMD). However, for those retirees turning 73 this year who have never dealt with RMDs before, there can be a lot of items to consider beyond just “how and when do I take my RMD?” (for a referesher on what an RMD is and why we have them, click here to read my blog from August 2020)
Here’s a list of some things you may want to consider now that you’ve reached 73. As always, if you’d like to speak to one of our advisors about these topics and strategies, please feel free to reach out to us here: https://strategicpoint.com/meet-with-an-advisor/
- Be cognizant of the types of retirement accounts you have.
If a retiree has multiple retirement accounts, (IRA, 401k, 403b, SIMPLE IRA) in certain cases the IRS will allow the retiree to “pool” their RMD and if they’d like, they can pull the entire total amount from just one account.
HOWEVER, some retirement accounts are exempt from this pooling feature, so it’s important, as a retiree starts to plan out their RMD for the year, to note which accounts will have to take their own RMD. Failure to understand the distribution rules by account could result in higher distributions than you planned or wanted.
- You can probably take the money whenever and however you want.
If you have money still in employer plans, this may not be true, but when it comes to IRAs most firms (Fidelity, Schwab, Vanguard etc.) will let you take your distribution however and whenever you want. Some folks prefer to take their amount monthly and create themselves another monthly paycheck.
Those folks who may not need the money to live on may choose to wait until December to take their RMD, which gives the money 11 more months of tax-deferred growth. And remember, most places will let you change how you’re taking it whenever you want, so if things change, don’t be afraid to amend your current distribution plan during the year if it’s not working for you.
- Think about which assets will be sold to generate the cash to fund the RMD.
If a retiree isn’t working with an advisor, they will be faced with a decision on which assets to liquidate to raise the cash needed to send them their RMD. After a year like 2022, where stock and bond performance has been weak, if you sell assets to raise enough cash to cover your RMD this can be a great time to review your asset allocation. Choosing which assets to sell can be challenging, again feel free to reach out to us if you feel you need help.
- Speak with your accountant.
When the retiree is ready to start drawing funds, they will be allowed to have Federal Taxes and State taxes withheld at the time of the distribution. Retirees should ask their accountant for suggested tax withholding percentages before they start taking funds. Your accountant will want to know how much your expected RMD will be so that they can determine what you should have taken out for taxes, so be prepared with that information when you reach out to them.
- Learn about IRMAA.
IRMAA stands for Income-Related Monthly Adjustments Amounts.
Most Americans know what the base rate cost of Medicare is but are unaware that Medicare is an income-based program. As a retiree’s income rises, the potential for their Medicare costs rises with it. While the brackets are quite large for married couples, single filers aren’t quite as lucky. The cost of Medicare costs can jump almost 40% a month if a retiree’s income pushed them into a higher IRMAA bracket. This probably won’t affect many, but it’s worth a quick review to make sure you understand how close/far from the next bracket your income level is.
- Learn about Qualified Charitable Distributions (QCDs).
If someone is already charitably inclined, then if they send a portion of their RMD amount directly to a 501(c)(3) charity, they will owe 0% tax on that portion of the distribution. Utilizing QCDs DOES require planning and coordination between the retiree, their financial advisor, and their accountant for a myriad of reasons beyond the scope of this short blog. But once the concept is explained, and everyone knows what part they will play, they can be an effective way to lower a retiree’s tax burden.
Laura and I covered this topic on a recent podcast, be sure to check it out here for some more tips and info! https://strategicpoint.com/the-novice-and-the-nerd-episode-29-qualified-charitable-distributions/
- More about QCDs.
If a retiree wants to take advantage of Qualified Charitable Distributions, they must know which of their retirement accounts allow it. Employer retirement plans like 401k’s and 403b’s do not allow for QCD’s, so you can only do them from traditional IRA’s. However, we encourage retirees to contact their custodian (Vanguard, Schwab, Fidelity etc) ahead of time to know if they allow them and what the rules are. Again, we strongly encourage anyone considering doing QCD’s to speak to both a financial advisor and their accountant before they start making these distributions. There is just too much room for error if they aren’t processed properly. Please reach out to us at 1-800-597-5974 or here if you think we can help https://strategicpoint.com/meet-with-an-advisor/
- Final thought
Just because you’re now 73 and you must start to take your RMD, it doesn’t mean additional tax distribution planning can’t be done. Many folks will continue to do things like ROTH conversions and/or filling their tax bracket buckets. If you’d like any help with these tips, we’re here to help you. Just reach out to us at 1-800-597-5974 or schedule a complimentary meeting with one of our advisors here: https://strategicpoint.com/meet-with-an-advisor/
The information contained in this post is not intended as investment, tax or legal advice. StrategicPoint Investment Advisors assumes no responsibility for any action or inaction resulting from the contents herein. Derek’s opinions and comments expressed on this site are his own and may not accurately reflect those of the firm. Third party content does not reflect the view of the firm and is not reviewed for completeness or accuracy. It is provided for ease of reference. Certain statements contained herein may be statements of future expectations and other forward-looking statements that are based on SPIA’s current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. In addition to statements which are forward-looking by reason of context, the words “may, will, should, expects, plans, intends, anticipates, believes, estimates, predicts, potential, or continue” and similar expressions identify forward-looking statements. Forward-looking statements necessarily involve risks and uncertainties, and undue reliance should not be placed on them. There can be no assurance that forward-looking statements will prove to be accurate, and actual results and future events could differ materially from those anticipated in such statements. SPIA assumes no obligation to update any forward-looking information contained herein.