Financial Planning, Tax Planning, Retirement Planning

4 Key Questions to Take Control of Your Required Minimum Distributions (RMDs)

February 13, 2024

SECURE 2.0i increased the minimum age for required minimum distributions (RMDs), but at some point, virtually everyone who has an IRA, 401(k), or pension plan is required to take RMDs (hence the name). But not everything about RMDs is set in stone. You can plan for and control RMDs to support your overall financial plan by asking a few key questions.

Which account should fund your RMD?

You likely receive a letter stating the RMD for each retirement account, but you aren’t required to take that specific RMD from that specific account. You can take all of your RMDs from one IRA, divvy it up over all of your IRAs, or use any proportion you want.

Some people use their RMD as a way to rebalance their portfolio, like selling overweighted positions or sectors to raise cash to fund the RMD. Some use RMDs to simplify their life, by taking all of the RMDs from their smallest IRA until it is gone or combining all their like-kind IRAs into a single IRA and taking their RMD from there.

Note: Inherited IRAs and employer-sponsored IRAs and plans cannot be aggregated or combined.

When should you to take your RMD?

You must take your RMD by 12/31, but you can take it at any time during the year. Some wait until year end to maximize tax-deferred earnings and avoid estimated taxes, if applicable.

For those who are over 70.5 and charitably inclined, timing can be very important. Done right, a qualified charitable distribution (QCD) can satisfy your RMD without counting as taxable income, but only if you haven’t already satisfied your RMD when the QCD is made. If you are considering a QCD, you should consider delaying your RMD.

Should you pay taxes on your RMD? (No, seriously.)

A QCD directly transfers funds from your IRA to a qualified charity, up to $105,000 per taxpayer/IRA owner (increased from $100,000 in 2023). If you are over 70½ and make a QCD prior to taking your entire RMD, the QCD: can satisfy your RMD for the year and will be nontaxable/excluded from adjusted gross income. In addition to eliminating tax on your RMD, a QCD is one of several charitable giving techniques to help those who no longer are able to itemize deductions on their tax return.

Should you reduce / avoid RMDs altogether? (No, seriously.)

A Roth conversion - transitioning a traditional IRA/401(k) to a Roth - will avoid future taxable RMDs (since Roth IRAs are exempt from RMDs during lifetime, and post-death RMDs are not taxable). A Roth IRA conversion can be done in whole or in part and can be advantageous when you're in a lower tax bracket. However, a Roth conversion is taxable, and there are some restrictions in year 1 of taking RMDs, so it needs to be planned and timed strategically.

You are also able to postpone your first RMD but must take two the following year. Your postponed RMD must be taken by April 1st of the following year. This strategy works if you will have lower income in year two.

Do you have questions about how to get the most out of your RMDs?

Contact one of our wealth advisors today. No matter where you are in life, we can help.

i Securing a Strong Retirement Act of 2022

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