Required Minimum Reading on RMD’s: For Owners and Beneficiaries

SECURE 1.0 made some initial progress in Setting Every Community Up for Retirement Enhancement by canceling the ‘stretch’ IRA payments for non-spousal beneficiaries and minimally raising the age on Required Minimum Distributions. SECURE 2.0 builds upon the work started by SECURE 1.0 and makes significant changes to assist taxpayers in saving for retirement. In this installment, we will review several facets of required minimum distributions as they relate to owners and beneficiaries of tax-deferred retirement accounts.

Overview of Required Minimum Distributions

What: Required Minimum Distributions (RMDs) are minimum annual amounts of monies that a retirement plan account owner must withdraw from their account(s) each year upon reaching a certain age, mandated by the IRS.

Who: Applies to an account owner (and beneficiary-discussed later) with a balance in an IRA, SEP IRA, SIMPLE IRA, as well as retirement plan accounts such as a 401k.

When:

Why: These retirement accounts are tax-deferred accounts, meaning you haven’t yet paid taxes on all the deductible contributions you have made over the years. Uncle Sam doesn’t give out free lunches. 

How: Calculations for RMDs on IRAs are based on the prior year-end balance of all your IRA accounts aggregated together. Qualified retirement accounts must each have their RMD calculated separately. The IRS uses two separate tables, the Uniform Lifetime Table (most common) and the Joint Life and Last Survivor Expectancy Table (used if your spouse is your sole beneficiary and more than 10 years younger than you).

It is common for owners to spread out the amount of the RMD’s throughout the year, taken in either monthly or quarterly installments; however, it can be taken in a lump sum as well. It is recommended that you coordinate your withdrawal schedule as part of your retirement income strategy with your other sources of income.

Planning Considerations Revolving Around RMD’s

For those who will begin taking monies from their IRAs during their 73^rd birth year, the percentage of the account value that must be withdrawn is over 3.5%. On your 80^th birth year that percentage increases to almost 5% and rises to over 6% on your 85^th birthday. This increase in income could increase your Medicare premiums as well as the percentage of your Social Security subject to tax. But wait, don’t blow out those candles just yet….here are a few items you should explore with your financial advisor in coordination with your overall financial plan:

• Roth Conversions: You will pay tax in the year the conversion is made, but this reduces the balance in your IRA/401k, thus reducing your future RMD amount. This is a great planning strategy when income is reduced due to retirement.
• Qualified Charitable Distributions: SECURE 2.0 does not change the age at which QCD’s can be made. QCD’s can still begin at age 70 ½, thus providing an additional year an account owner could utilize this giving and planning strategy due to the newly enacted RMD age requirements.
• Optimizing Social Security Benefits: Using tax-deferred accounts as an income bridge to further delay filing for social security benefits would reduce the balance of your IRA/401ks, thus reducing future RMD amounts. You can delay filing up to age 70.

Surviving Spouse Beneficiaries on Tax-Deferred Retirement Accounts

Currently, surviving spouses have several options to explore upon inheriting assets from a spouse’s IRA/401k depending on whether the deceased spouse reached the age required to begin taking RMD’s prior to their death:

However, beginning in 2024, spousal-beneficiaries will now have an additional option to be treated as the deceased spouse. This could create several benefits if exercised, such as:

• RMD’s would be delayed until the deceased spouse would have reached the age requirement to begin taking RMD’s.
• The surviving spouse can use the Uniform Lifetime Table as opposed to the Single Lifetime table, essentially lowering the RMD requirement amount per year.

This option would be best when the deceased spouse was younger than the surviving spouse.

These options require careful planning, and an overall understanding of your income planning needs as certain options could be more favorable in your unique situation. 

Inheriting IRA/401k’s as a Non-Spousal Beneficiary

There are two categories of non-spousal beneficiaries: eligible designated beneficiaries and designated beneficiaries. Eligible designated beneficiaries include:

• minor children of the original account holder,
• chronically ill,
• permanently disabled,
• beneficiaries not more than 10 years younger than the original account holder (i.e.-sibling).

Eligible designated beneficiaries have more options available for withdrawing required distributions than a designated beneficiary, including taking minimum distributions using the Single Life Expectancy table. Designated beneficiaries do not have the luxury of stretching out distributions and must deplete the account by the 10^th year following the death of the original account owner. Designated beneficiaries must take RMDs each year during the 10-year period if the original account owner had reached the age for RMD’s prior to their death.

We encourage beneficiaries to seek professional guidance in determining how an inheritance may affect their own financial plan.

Reduced Penalty for missed RMD’s

Beginning in 2023, the excise tax accessed on missing an RMD, whether partial or full, will be reduced from 50% to 25%. If the shortfall is corrected within the “Correction Window”, the penalty would be further reduced to 10%.

Understanding how your retirement accounts play a role in your overall financial plan is a vital element in optimizing your financial peace and independence. There are so many facets to consider for not only yourself, but also your loved ones.  Here at CPS, you matter to us, and we care about the goals you plan to achieve. We welcome you, your family, and your friends with open arms. Onward and forward, Steady as you Grow.