Ask an Advisor: Clients Are Asking About RMDs – What Retirees Need to Know Amid Law Changes and IRS Guidance Shifts

Ask an Advisor: Clients Are Asking About RMDs (Required Minimum Distributions) – What Retirees Need to Know Amid Law Changes and IRS Guidance Shifts

I’m anticipating more inquiries about RMDs (Required Minimum Distributions) in the coming days as 2023 nears an end. First off, clients need to know when and how much of RMDs to avoid tax penalties. Here’s the answer: RMDs apply to all retirement accounts linked to your Social Security Number (SSN). Making sure you meet these RMD requirements in total is a top priority.

Once you’ve figured out your RMD amount, they ask what’s the best move for that money? Well, if you don’t need it immediately for your everyday expenses, consider shifting it to a non-qualified account for some reinvestment action, rather than letting it sit idly in cash. It’s a savvy move, unless your emergency fund needs funding, that’s first.

Some folks catch a break from RMDs, like those still working and contributing to their employer-sponsored accounts or those facing their first RMD year. Exploring different planning options can help you delay or soften the RMD hit and make sure it aligns with your broader investment, charity, and tax goals. For instance, Qualified Charitable Distributions (QCDs) can save you a bundle in taxes each year. If you’re 70.5 or older and planning to donate to charity, consider making a QCD. It’s a tax-efficient way to give. Plus, QCDs don’t mess with your (AGI), which plays nicely with your overall tax planning. Just keep in mind the QCD rules, like the $100,000 cap and donating to a legitimate charity.

Don’t forget to review your RMD tax withholding for accuracy. If you’ve had substantial taxable portfolio income this year (capital gains, dividends, interest, etc.), think about earmarking your RMD for tax withholding. I’ve had a client that withheld 100% of their RMD. It’s like a safety net for any missed quarterly tax payments and helps you avoid under-payment penalties.

And if you’re considering Roth conversions this year, use your RMD to cover the tax bill from the conversion. Just remember, you’ve got to take that RMD Before you implement Roth conversions.

Lastly, next year, don’t procrastinate on RMD planning until the year-end frenzy. By addressing it early on, you can smoothly integrate RMDs into your retirement strategy and stay on top of your broader financial goals. And have fun with it? Absolutely! Retirement planning should be a journey you enjoy, one where you’re constantly learning and adapting.

It’s also crucial to consider the effect of RMDs on your Medicare premiums. Since RMDs increase your income, they could potentially bump you into a higher bracket for Medicare Part B and D premiums. It’s all about finding that sweet spot where your RMDs fulfill IRS requirements without unnecessarily increasing your Medicare costs.

Remember, RMDs are not just a tax obligation; they’re an opportunity to reassess your financial health annually. Use this as a chance to review your overall retirement plan. Are you on track with your goals? Do your investments align with your risk tolerance and retirement timeline? This yearly exercise can reveal a lot about your financial wellness and give you a chance to course-correct if needed.

In conclusion, managing RMDs is about striking a balance. It’s about fulfilling your tax obligations while also leveraging opportunities for smart financial moves. Stay informed, stay proactive, and always keep your financial well-being in focus. That’s how you make RMDs work for you.

About the Author

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This article is intended for informational purposes only, and should not be considered financial advice. You should consult a financial professional before making any major financial decisions.

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