Planning in retirement
On the last day of 2023, several things were on my mind. First, who is my audience? My children say they do not read the paper, while at the same time when I send them copies of my articles, they like them. My friends and customers tell me they like my articles. So I think I will continue to write about things that are on my mind.
Second, RMDs – short for Required Minimum Distribution – have become the topic of discussion for my friends and myself.
If you have reached the age of 65 and have qualified retirement money, RMDs should be on your mind. Qualified retirement money refers to any retirement plan that you have not paid tax on. If you are receiving benefits from a defined benefit plan or have annuitized a qualified retirement plan, RMDs are only your concern if you have additional qualified plans that you have not taken RMDs from.
The purpose of RMDs is simple: the government wants its share. You generally must start taking withdrawals from your traditional IRA, SEP IRA, Simple IRA, and retirement plan accounts when you reach age 72 (73 if you reach age 73 after Jan. 1, 2023). If you do not take the required RMD by the required date, you face a penalty of 25% of the withdrawal.
Each year, the custodians of your traditional IRA, Sep IRA or Simple IRA must send you an RMD notification if they held that account on Dec. 31 of the preceding year. This notification must be sent to you by Jan. 21 of the year when the RMD applies.
Some custodians will include a calculation of your RMD amount for the year, while others will inform you that an RMD amount is due and only offer to compute the amount upon your request. RMDs are treated as income by the IRS. This additional income can affect your tax bracket and your Medicare premium.
RMDs can be taken monthly, quarterly, semiannually or annually. Waiting until the end of the year to take an RMD may enable the qualified account to grow but result in a larger RMD amount.
One of the most popular RMD strategies for reducing taxes involves donating the amount to charity. The IRS allows you to donate up to $100,000 a year from an IRA without having to pay income tax. The money you withdraw will still count toward your RMD so you don’t have to worry about a 25% tax penalty for failing to take distributions. There are a few rules for this strategy and I would advise talking to your tax adviser.
To eliminate the problem of RMDs, consider converting your qualified plan to a Roth IRA. Roth IRAs offer the benefit of 100% tax-free qualified withdrawals. Understand you will have to pay tax on the conversion in the year it occurs. This strategy may work best if your plan is to pass on the money to your heirs. The Roth IRA allows you to pay assets tax-free to heirs, meaning that later they won’t be taxed on the principle.
Before making any decisions on what to do with your RMDs, consult you tax adviser.
If you have a topic you would like me to write about email me at Bob@Bobhollick.com.