Age for Required Minimum Distributions from Retirement Accounts increases to 73 in 2023

RMD Age Goes Up

Starting in 2023, you will have to start taking RMDs from your traditional IRAs, traditional 401(k)/403(b)s, and Roth 401(k)/403(b)s at age 73. Starting in 2033, the age will increase to 75.

RMDs: An IRS Change is Making Them Smaller in 2022

 The way you calculate your required minimum distribution (RMD) just changed.

"The methodology of calculating your required minimum distribution (RMD) is rather simple. Your yearly RMD is calculated using a formula based on the IRS’ Uniform Lifetime Table. Basically, this table estimates the maximum number of years (also known as distribution periods) your retirement account may need to make RMDs to you and your surviving spouse" writes CFP Chris Gullotti, for Kiplinger's. 

"Your distribution period gets shorter every year, based on your age. For example, if you take your first RMD in 2022 at age 72, your distribution period is 27.4 years." When you turn 74 it will be 25.5 years . When you turn 80 it will be 20.2 years, etc.  

The RMD amount is based on the value of your retirement accounts at the end of the previous year. "Say your IRA was worth $500,000 at the end of 2021 and you’re turning 72 in 2022. The IRS distribution period for 72-year-olds is 27.4 years. So, if you divide $500,000 by 27.4 years, you get $18,248. That’s what your RMD for 2022." 

"With 401(k) plan accounts... most plan providers will calculate your annual RMD and make the distribution on your behalf."

"With other accounts you have more flexibility, and thus more options to consider. For example, if you have several traditional or rollover IRAs, you first need to calculate the RMD for each individual account. Many IRA custodians will do this for you. The challenge comes when you decide how much to withdraw from each account."

• You can take separate RMDs from each account.
• You can take the total combined RMD from one account.
• Or you can withdraw different amounts from several accounts that, when combined, add up to the total RMD amount.

"Or, you might want to consolidate all of your various IRA and 401(k) accounts into a single rollover IRA with a custodian that calculates your RMDs for you."

"Another option: You may fulfill your annual RMD requirements without having to pay taxes on them by making a qualified charitable distribution of the RMD directly from your IRA custodian to a qualified public charity."

Required Minimum Distributions from IRAs and 401(k) accounts

Required Minimum Distributions (RMDs) are calculated differently for distributions from multiple IRAs and multiple 401(k) plans.

If you have more than one traditional IRA, the RMDs are calculated separately for each IRA but can be withdrawn from any of your accounts. 

However, if you have multiple 401(k) accounts, the RMD must be calculated for each 401(k) and withdrawn separately from each account. Some 401(k) administrators calculate your required distribution and send it to you automatically if you haven't withdrawn the money by a certain date, but IRA administrators may not automatically distribute the money from your IRAs.

https://www.kiplinger.com/retirement/602564/questions-retirees-often-get-wrong-about-taxes-in-retirement

 

 

Paying taxes on tax-deferred retirement accounts

"Q: My wife has a 403(b) account. We have read that if we were to withdraw money to, say, pay off our mortgage, the government will tax the withdrawal. Is this true, and if so, why is there a tax on those funds, especially for seniors?

A: I get this question quite a bit.

People have saved for decades in tax-advantaged retirement plans such as a 401(k) or 403(b) looking forward to the time they can tap the money. But it’s a rude awakening when they realize the taxes that are owed. It seems unfair because what’s on paper is not what they will net.

But that’s the bargain you agreed to when you were allowed to invest pretax money into such plans. Eventually, the IRS will want its cut. This is also why there are required minimum distributions or RMDs.

“You cannot keep retirement funds in your account indefinitely,” the IRS reminds taxpayers.

If you don’t take any distributions, or if your RMD is not large enough, you may have to pay a 50 percent tax on the amount not withdrawn as required.

As the IRS explains it, your required minimum distribution is the minimum amount you must withdraw from your account each year. You generally have to start taking withdrawals from your retirement plan account or IRA when you reach 72. It used to be 70 ½. Roth IRAs do not require withdrawals until after the death of the owner.

Here are the retirement accounts that fall under the RMD rules:

— Employer-sponsored retirement plans, including profit-sharing plans and 401(k), 403(b) and 457(b) plans.

— The Thrift Savings Plan (TSP), the federal government’s version of a 401(k).

— Roth 401(k). Even though you don’t have to pay income tax on the withdrawal, you still have to take an RMD. A Roth IRA does not require withdrawals until after the death of the owner.

— Traditional IRA.

— Simplified Employee Pension (SEP) and Savings Incentive Match Plans for Employees (SIMPLE).

But there are always exceptions and caveats in tax law. The IRS has an FAQ page if you need additional information.

So, yes, as frustrating as it may be, your withdrawals will be included in your taxable income."

Thanks to Michelle Singletary, author of "Color of Money" column in The Washington Post.

 

Qualified charitable distributions that save retirees on their income tax bill

Consider Giving Your Required Minimum Distribution to Charity

"If you're over 70½, you can give up to $100,000 each year tax-free from your IRA to a 501(c)3 charity, called a "qualified charitable distribution" or QCD. The gift counts as your required minimum distribution but isn't included in your adjusted gross income. (Even though the minimum age for RMDs rose to 73, it's still 70½ for QCDs.)" Source: Start Planning for Your 2021 RMDs Now by Kimberly Lankford, USNWR, https://money.usnews.com/money/retirement/iras/articles/start-planning-for-your-rmds-now

QCDs can come from a TRADITIONAL IRA, not a Roth IRA because you've already paid taxes on the contributions to your traditional IRA but not your Roth.

You must be at least 70½ at the time of the distribution. A QCD can be made after age 70½ even if you're not subject to RMDs yet (because you're under age 73, as of 2024).

RMDs are required because you took advantage of a tax break while savings for retirement; check out my blog posts on required minimum distributions.

This can be especially helpful if you don't itemize your income-tax deductions and wouldn't be eligible for much of a tax break for your charitable contributions. Keeping the donation money out of your AGI can also help you avoid the Medicare high-income surcharge and may reduce the portion of your Social Security benefits that is subject to income taxes. Medicare participants who earn a high income have to pay an IRMAA, an extra charge on Medicare Parts B and D. The fee kicks in if you make more than  $103,000 in 2024 or if you and your spouse collectively earn over $206,000 in 2024).

Far fewer tax payers itemize their deductions now that the standard deduction is $29,200 for married couples filing jointly. The standard deduction for a single person will be $14,600 in 2024 (for income earned in 2024 and tax returns filed in 2025).

• If you are 65 or older, single, married filing separately, or head of household, you may increase your standard deduction amount. If you are a single senior taxpayer, you can claim an additional standard deduction of $1,950, married seniors are entitled to an additional $1,550.

• If both of you are 65 or above, the increase in the standard deduction is equal to $3,500.

Qualified charitable distributions are probably the best tax break available for retirees and are underused. Donate the money from your IRA to charity before making other kinds of charitable contributions. Ask your IRA administrator for the procedure – the money must be transferred directly from your IRA to the charity for it to stay out of your AGI.

Note that the charity will send you a charitable donation receipt BUT you cannot claim a charitable deduction for a QCD. So be sure to keep track of which donations were made through a QCD. Your IRA custodian has no way of knowing if a particular distribution meets all the requirements for a QCD.  

Skippiing mandatory RMDs... the details

Skipping a mandatory distribution from your IRA? Everything you need to know

Wed, Apr 8 2020 by Darla Mercado

"This year, the coronavirus relief law is letting savers bypass mandatory withdrawals from their retirement accounts."  The one-year reprieve enables those who can afford to leave the money invested a better chance of recovering losses.

Key Points

• The coronavirus relief bill allows savers to bypass any required minimum distributions they must take from their IRAs and workplace retirement plans in 2020.
• This RMD delay also applies to beneficiaries of inherited IRAs.
• A bonus: You don’t have to withdraw from the account during the current market rout.

Temporary relief applies to: traditional individual retirement accounts, 401(k), profit-sharing plans, 457 accounts, and 403(b) plans).

Additional details from the WSJ:
People who took required distributions since Feb. 1 may be able to use the so-called 60-day rule to return the money. To qualify, you normally have to put the money back within 60 days of receiving it. But the IRS allows anyone who took an RMD between Feb. 1 and May 15 to return the money by July 15.
The IRS reprieve doesn’t help retirees who took RMDs in January and want to put that money back in the accounts... unless the IRS issues more relief. Stay tuned.

In addition, the Secure Act, which took effect at the start of 2020, raised the RMD start age to age 72.

Get the details at: https://www.cnbc.com/2020/04/08/skipping-a-mandatory-distribution-from-your-ira-what-you-need-to-know.html

To ease stock-turmoil jitters, try these strategies

Writing for The Wall Street Journal (3/9/20), Anne Tergesen interviewed Dr. Wade Pfau, a leading investing researcher and professor at the American College of Financial Services. For investors far from retirement, there is no need to panic but now is a good time to review your asset allocation. But for those nearing or in retirement, Pfau advises:
1. Check in with Your Accounts. are you investing enough to meet your goals? A quick reminder, using the 4% guideline, you need $1 million to be able to withdraw $40,000/year in retirement with a portfolio of 50-75% stocks. If your tolerance for risk doesn't allow such a high % in stocks, prepare to save a lot more.
Are you appropriately diversified both across and within asset categories?
2. Go More Conservative. Research by Pfau and colleagues suggest entering retirement with 20-30% in stocks and gradually increase the % over time to 50-75%. This recommendation should serve you well to ensure your assets last 30 years even with extended bear markets. This strategy is designed to provide downside protection at the beginning of retirement when you are most vulnerable to losses.
3. Work Longer. If you haven't invested enough, the best strategy is to work longer. If already retired, the current economy offers plenty of part-time work. Working longer, combined with delaying Social Security, is a powerful strategy for ensuring you won't run out of money before you run out of breath. For every year you delay taking SS (up to age 70), your benefit increases 7-8%.
4. Cut Spending. For retirees who are willing to be flexible and cut their spending when investment earnings are down, you can adjust withdrawals to a 4-6% range. You recalculate the "safe" withdrawal rate each year based on the previous years growth (or loss) in your investments. To ensure you don't run out of money you can follow the IRS's Required Minimum Distribution table.
5. Spend from Winners. Start by setting aside 5 years of expense in cash/savings to avoid having to sell investments at a loss. A better strategy is to selectively take your living expenses from assets that have increased in value. Rebalance your assets by moving money from categories that have increased in value to assets that have lost value. This automatically results in buying low and selling high.

Required Minimum Distributions from taxable retirement accounts

Required Minimum Distributions (RMDs) are designed so that the government can start recouping taxes from retirement accounts such as traditional (NOT Roth) IRAs, 401(k)s, 403(b), 457 and other tax-advantaged accounts. Congress just passed a law to delay the date at which one must start withdrawing funds and paying taxes on the withdrawals.

The rules on when retirees must take required minimum distributions (RMDs) changed as of Jan. 1, 2020, thanks to the SECURE Act, which was signed into law on Dec. 20, 2019.
The SECURE Act now delays those required distributions until age 72.

If you were born on July 1, 1949, or later, you do not have to take an RMD until age 72.

If you were born before that, you fall under the old RMD rules, and you'll be forced to withdraw money (whether you need it or not) every year starting after age 70½.

"The required minimum distribution for any year is the account balance as of the end of the immediately preceding calendar year divided by a distribution period from the IRS’s “Uniform Lifetime Table.” A separate table is used if the sole beneficiary is the owner’s spouse who is ten or more years younger than the owner." This info is from the IRS website but they have not yet (1/13/20) updated the site to the new age of 72. 

Notably, RMDs for individuals who turned 70 1/2 in 2019 are not delayed, and instead, such individuals must continue to take their RMDs under the same rules prior to passage of the SECURE Act. Despite the delay in the starting age for RMDs, though, Qualified Charitable Distributions (QCDs) from IRAs will not be affected by the SECURE Act; accordingly, QCDs may still be taken from IRAs as early as age 70 1/2. QCDs from TRADITIONAL IRAs allow the taxpaper to contribute directly to a 501(c)3 organization from a taxable traditional IRA and avoid paying taxes on the withdrawal from the IRA.

Required Minimum Distributions from retirement accounts

"RMDs, as they are commonly known, are the minimum amount individuals who are age 70½ and older must take out of their retirement funds such as individual retirement accounts or workplace-based accounts such as 401(k) plans." Lorie Konish explains that RMDs are based on IRS longevity tables.
Key Points

    *"If you’re 70½ or older, or inherited a retirement account, you need to take your required minimum distribution by Dec. 31."
    *"Now is the time to get organized and start thinking about that distribution. If you miss the Dec. 31 deadline, you will face a tax penalty."
    *"Here are the steps to take and moves to consider so you don’t leave money on the table."

“Always take an inventory first, so you know where all your retirement accounts are."
Consult the IRS RMD tables to determine the amount but have a financial professional or the institution holding your account double-check your RMD calculation.

If you have multiple IRAs or 403(b) accounts, you can take your total RMD from any one or a combination of those accounts.

However, if you have more than one 401(k) account, you have to take money from each one.

Be sure to have a plan for paying your income taxes. The full article offers suggestions.

One way to avoid paying taxes on your RMD: Give the money to charity.

"A qualified charitable distribution allows you to make donations to a charity directly from your IRA."

"So if your RMD is $5,000 and you typically give $5,000 to charity each year, you can donate that money and not pay tax on it."