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At Quorum, we want our clients to understand all of the potential sources of income they’ll have available in retirement. This often opens discussions about required minimum distributions (RMDs) and the role they play in a retiree’s income strategy.

It’s a particularly relevant conversation for 2023, as Congress recently updated the rule around when retirees need to begin taking RMDs. If you’re older than 72 and/or already taking RMDs, you won’t be affected by the recent changes. For anyone else, we put together an article detailing the changes included in SECURE 2.0 Act.

To help you understand why updates to the rules around RMDs are important, we want to take a minute to what RMDs are and how we incorporate them into our clients’ financial plans.

What are RMDs?

The IRS requires seniors to take money out of their tax-deferred retirement accounts each year. In their words: You cannot keep funds in your retirement account indefinitely. In other words: You made pre-tax contributions to a retirement account that grew tax-free during your lifetime, and the IRS wants to ensure it gets its cut.

So, when you reach a certain age, you must begin making withdrawals from any non-Roth retirement accounts you have including:

●      401(k)s
●      403(b)s
●      IRAs
●      SEP IRAs

These withdrawals are subject to federal and state income tax.

How are RMDs calculated?

You generally won’t have to calculate the amount of your RMD payments yourself. For employer-sponsored plans (such as 401(k)s) the plan sponsor or plan administrator usually does this. For IRAs, your financial advisor will usually handle the calculations.

Still, it’s helpful to understand how they’re calculated so you can see how they fit into your overall financial picture in retirement.

Your minimum withdrawal each year mainly depends on the balance in your pre-tax retirement accounts, your age and, If you are married, the age of your spouse. The IRS provides a distribution period based on those circumstances. (This distribution period is also known as the "Single Life Expectancy" found on the IRS's Life Expectancy Tables).

To calculate your required minimum distribution amount for a given year, take your pre-tax retirement account balance(s) from December 31 of the prior year and divide it by the distribution period.

If you have multiple pre-tax retirement accounts, you can calculate your RMD(s) by looking at all like-accounts together. For instance, if you had three IRAs, you could calculate the RMD for all three accounts and choose which account(s) to withdraw the amount from. However, if you also had three 401(k)s, you’d need to calculate the RMD for the 401(k)s separately from your IRAs, and withdraw that RMD from a 401(k) account or accounts.

A financial advisor can help you be strategic about which accounts to withdraw from—even which assets you may want to sell—based on how your investments are allocated and your overall financial picture.

Preparing to Take RMDs

One question we get at Quorum Private Wealth:

“What if I don’t need the income? Do I still need to take RMDs?”

The short answer is: Yes. If you don’t you may face a substantial fine. While Congress lowered this fine at the end of 2022, it’s still significant: Up to 25% of the amount you failed to withdraw. Pre-SECURE 2.0, the penalty was up to 50% of the amount you did not withdraw. But, as of 2023, this penalty has decreased to 25%.

Let’s assume you were required to withdraw $80,000 this year—if you only withdrew $40,000, the IRS could fine you up to $10,000. This fine may be reduced to 10%, or $4,000, if you correct it in a “timely manner.”

If you don’t need the withdrawal as income, there are other ways to approach the distribution. For instance, you can donate the designated amount to a charity, known as a qualified charitable distribution (QCD). There’s no income tax on this distribution and it satisfies the RMD requirement.

Of course, the IRS has guidelines for how this must be handled, and the amount you donate annually is capped at $100,000. (This amount will be adjusted for inflation starting in 2024.)

You could also convert your distribution into a Roth IRA. You would still pay income tax on the distribution, but this approach keeps you invested, and your money has the potential to continue growing tax-free. You may consider this if you plan to leave the account to any heirs as part of a legacy plan.

Finally, there is no penalty for withdrawing more than the required minimum. You may do this to fund a large purchase in retirement. However, these distributions should be considered as part of an overall income strategy. Not only do withdrawals contribute to your taxable income, potentially impacting your tax bracket, you’re also lowering the balance in your account, which can impact your overall plan in retirement. (It may also affect how much you’re required to take in RMDs in subsequent years.)

Considerations about RMDs

As of January 1, 2023, the RMD age increased to 73 (previously, it was 72). In 2033, it’s set to increase again, this time to 75.

If you aren’t sure whether to delay RMDs, we can meet to discuss. We’ll look at your budget and income needs, goals, the other sources of income you have available, and how your portfolio is invested (namely, your overall risk level).

In general, we recommend waiting as long as possible to begin taking RMDs for tax purposes, and to give your investments more time to grow. However, as with everything there are exceptions to this thinking and the best plan for you depends on your (and your family’s) circumstances.


Other posts you may enjoy:

The latest law to impact your retirement: SECURE 2.0

Roth conversions: When (and why) they make sense