Financial Insights

Planning Opportunities to Consider Before Year-End– A Series Part 1 – Required Minimum Distributions

The end of the year provides a number of planning opportunities and issues for financial advisors to discuss with their clients. Year-end topics can include tax planning, rebalancing investment and retirement accounts, Roth IRA conversions, charitable giving, reviewing cash flow and savings rates, as well as insurance and estate planning. We will address a number of planning issues over the next few weeks that our clients need to consider prior to year-end to ensure they stay on track, beginning this week with Required Minimum Distributions (RMDs).

A Required Minimum Distribution, or RMD, is an IRS-mandated amount of money that you must withdraw from traditional IRAs or employer-sponsored retirement accounts each year. It’s important to understand when you need to take an RMD, how to avoid potential costly penalties for late distributions, and maximize your withdrawal strategy.

The IRS updated their Retirement Plan and IRA Required Minimum Distributions FAQs to reflect the change in the qualifying age for RMDs brought by Congress passing the Secure Act 2.0.  For clients who recently reached the qualifying age for a required minimum distribution or inherited an IRA in the last year, withdrawing your RMD can be a new process and potentially costly if not incorporated into your plan properly.

The IRS requires that you start taking RMDs from your tax-deferred retirement accounts at age 73. Technically, your first RMD must be taken by April 1st of the year after you turn 73. This would allow those clients turning 73 in 2023 the ability to defer this first withdrawal until 2024. This may seem like a good idea to avoid incurring taxes this year; however, you would still be required to take your age 74 RMD by December 31st of that calendar year. This results in taking two distributions in the same tax year which may push you into a higher tax bracket, creating a higher total tax bill and impacting the taxes you pay on Social Security and Medicare. There’s no way to avoid paying income taxes so we help our clients pay their taxes at the lowest possible rate when we can. Working with your ACM advisor to incorporate your RMDs as part of your annual cash flow plan is essential to optimizing your income in retirement.

RMDs must be taken out of tax-deferred retirement accounts, including:

RMDs from multiple IRA accounts can usually be aggregated, meaning your RMD will be calculated using the previous year-end account value of all of your retirement accounts combined (if you have multiple). You can designate which accounts to take your distributions from, taking more or less from one or others. RMDs from qualified employer retirement plans usually must be calculated and taken separately, with no aggregation allowed.  However, 403(b) plans are an exception, and RMDs from multiple 403(b)s can be aggregated.  If you are still working, you may also be allowed to delay an RMD from a 401(k) or 403(b) from your employer sponsored plan until after you retire. This rule does not apply to people who own more than 5% of the business for which they are working and you may run into the same issues of deferring distributions into future tax years, pushing you into a higher tax bracket and ultimately paying more in income taxes.  Again, consulting with your ACM advisor to optimize distributions as part of your cash flow plan is essential.

The IRS taxes RMDs as ordinary income, meaning withdrawals will count toward your total taxable income for the year. Distributions will be taxed at your applicable federal income tax rate and may also be subject to state and local taxes. Some states that normally tax earned income may have preferential income tax treatment on retirement account distributions or don’t tax distributions from retirement income at all. It is important to know how your state treats retirement income as part of your overall plan. If you made after-tax contributions to your IRA, or 401(k) and did not roll them over to a Roth IRA, you have the ability reduce your taxable income proportionately by your basis of your contributions each year. We suggest you work in tandem with your ACM advisor and Accountant in these situations to avoid paying “double taxes” on after tax retirement plan contributions.

Don’t miss taking your RMD for the 2023 tax year, regardless of your account type as the IRS penalty is pretty severe—25% of the amount not taken on time. We all want to be efficient with planning our distributions, but giving away 25% to the IRA in addition to your tax obligation on your RMD is something we strongly advise avoiding. Secure Act 2.0 dropped this penalty to 25% from 50% starting in 2023, with the possibility of reducing it further to 10% if you take your missed RMD during the “correction window.”

There are no RMDs for Roth IRAs, unless they are inherited. We’ll address Roth conversions in a future commentary, but it may prove worthwhile to combine distributions from a Roth IRA with your RMDs to cover a spending need, rather than taking more than is required from your traditional retirement accounts if it will push you into a higher federal, state or Medicare surcharge (IRMAA) tax bracket.

Inherited IRAs are whole different animal thanks to the SECURE ACT 1.0 passed at the end of 2019. If you inherited IRA before 2020, you will continue to follow the old rules that allow the beneficiary that inherited the IRA to ‘stretch out’ RMDs over their life expectancy .For any IRAs inherited by beneficiaries in 2020 or later who are not eligible designated beneficiaries (spouses/minor children/disabled/not more than 10 years younger than account owners), the “stretch” was eliminated and replaced by the “10-year rule”. The 10-year rule means that IRAs inherited by adult children from their parents have to be completely distributed by Dec 31 of the 10th year after the year in which the account holder died. There has been a lingering question as to whether RMDs on post-2019 inherited IRAs need to be taken in years 1- 9. The IRS has shared ‘proposals’ on this issue, but no final rule has been made, except that for the second consecutive year, no one will be subject to the 50% penalty for not taking an RMD in 2023. This provides a planning opportunity with your advisor on whether it makes sense to defer or accelerate distributions from an inherited IRA depending on, you guessed it, your applicable income tax rates.

***Deadline Dates***:  any request to process RMDs sent to the custodians after the dates listed below will be processed on a Best-Efforts Basis and are not guaranteed to be completed by 12/31/23:

If you haven’t already, as part of your comprehensive review, speak with your ACM Advisor about your potential RMD obligation to make sure you are avoiding any penalties and not incurring unnecessary income taxes, both this year and in the future, by optimizing your withdrawal strategy.

The foregoing content reflects the opinions of Advisors Capital Management, LLC and is subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. Past performance may not be indicative of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses which would reduce returns. Securities investing involves risk, including the potential for loss of principal. There is no assurance that any investment plan or strategy will be successful.


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