all about rmds in retirement

How Should I Take My RMDs in Retirement?

Using tax-advantaged retirement accounts to save during your working years is a smart move. By using these accounts, you are deferring taxes. However, this postponement does eventually come with an expiration date. The government will come looking for its share. This bill comes in the form of calculated required minimum distributions (RMDs) beginning when you are age 72.

What are RMDs?

Required minimum distributions are withdrawals from your traditional retirement accounts such as 401(k) or an IRA. The amount is dependent on your savings and life expectancy. RMDs are calculated and serve to collect taxes on money that has grown tax-free. CPAs oftentimes do not want to take multiple RMDs because it increases taxability. However, whether liked or not, after 72, RMDs are mandatory.

How are RMDs calculated?

RMDs are calculated based on life expectancy and the total you have in your retirement accounts. Using one of three IRS tables, your life expectancy is given a factor number which is then divided into the funds subject to RMDs to determine what you need to withdraw.

What is the best way to take RMDs?

While the best way is always to consider your individual circumstances, there are two common ways to take RMDs. First, you may want to wait until the last possible minute which would be Dec. 31 of that year to maximize your returns. Secondly, you may want the regularity of a paycheck, so you could opt into 12 monthly payouts of the RMD.

Why You Should Never Skip & How to Ease Withdrawals

Skipping an annual RMD will result in heavy penalties versus what the income tax may have been. You would be fined a 50% excise tax of the RMD you should have taken. For instance, if you did not take your RMD of $10,000 you would have to pay a levy of $5000 to the IRS—an amount far greater than the income tax you would have needed to pay. Unfortunately, no catchups would be permitted in future years and no credit is given for taking more in past years.

The bill comes due to all tax-advantaged retirement accounts. Unfortunately, there is no way to avoid this, but there are a few ways to lighten the toll. Some strategies are following:

Charitable Donation

After calculating your RMD you can donate up to $100,000 to an authorized charity of your choice via a qualified charitable distribution (QCD). A QCD does not add to your taxable income, therefore you are lessened your tax bill and are providing funds for good causes. Note the QCD must be directly made to the charity. If you accepted it as an RMD and then donated, you may still be responsible for the taxes.

The Still-Working Exemption

CPAs not retiring at 72 are exempt, but the exception only applies to the current employer’s retirement plan. So, while it does not defer all RMDs, it helps! If you are approaching 72, consolidating your retirement accounts into your current employer’s plan may be a great idea.

QLAC Delays

You could use funds from a traditional retirement account such as your IRA or 401(k) to purchase a qualified longevity annuity contract (QLAC). Doing so may reduce your RMDs. As a deferred annuity, QLAC payouts can be put off until age 85, thus putting the tax bill the retirement funds used due later as well for approximately a decade.

Roth Conversion

As the only tax-advantaged retirement accounts, Roth IRAs do not have RMDs. You have a window between when you retire until when the first RMD comes due make use of Roth conversions. CPAs see their income drop after retirement making that window for Roth conversions more than perfect to convert traditional accounts into a Roth IRA while in the lower income tax bracket.

However, this often-underutilized retirement strategy comes with some risk.

  1. Moving pre-tax money means paying taxes when moved into the Roth IRA.
  2. You may increase the portion of your SS benefits that are taxed or may trigger the Medicare surcharge tax.

Ultimately, you can have your money grow tax-free, RMD-free until you or your family need the funds.

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2022 and You: Cause and Effect

In 2021, inflation reached a 40- year high from gas, lumber, the housing market, and even groceries. It was reported in October that the U.S. experienced an increase by 6% for the consumer price index. By November, a 7% increase was noted—the largest increase in such a short time since late 1982. Unfortunately, Americans, on average, brought more money home in their paychecks, but were not able to reap the benefits due to the inflation.

What does this mean for inflation in 2022? Economists have a gloomy outlook. With the unexpected, but impending price increases, it is important to allocate more in the budget for groceries and gas. To offset inflation, add more money to your emergency funds as you can. This will keep your retirement funds more secure.

Required minimum distributions, RMDs, had major changes in 2021 (and in 2020 when the Covid-19 pandemic started). As withdrawals for qualified retirement accounts—401(k)s, traditional IRAs, or 403(b)s—RMDS experienced a recent change that affects the age for when you can withdraw. Now it is 72 for those born after July 1st, 1949, and 70 ½ if born before then.

In 2020, RMDs were suspended under the CARES Act. This was in response to the 30% market drop that March. The hopes were to let the retirement money stay in the market and recover, but the 2020 change was short lived. RMDs resumed in 2021.

2022 Lookout:

Based on inflation rates, the IRS does make changes to tax brackets. Due to the 2021 inflation increase, the tax thresholds will drastically change.  This means more money can be earned before an individual or couple is bumped into the next tax bracket. Using tax-planning tactics during your working years and having a retirement plan in place allows for this potential risk to be easily managed during retirement.

Another major change happening this 2022 year is 401(k) contributions. The IRS is changing the max contribution for taxpayers. The increase is $1000 to $20,500. If you are age 50+, you get an additional $6500 as catchup. Unfortunately, traditional and Roth IRAs contributions are staying the same as 2021. However, high-income earners may be able to contribute to a Roth IRA. Income phase-out ranges were increased by the IRS to allow this. Ranging from $129,000 to $144,000 for single taxpayers and $204,000 to $214,000 for married and jointly filing.

**For more information on how is in store for 2022, please listen to Retirement Risk Show episode “The Know-How of Retirement Planning in 2022.” For all the challenges and changes 2022 will and may bring, register for our “Evolving Retirement Law: The Challenges, The Changes, and Your Choices” webinar.

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