This time of year can bring plenty of change, whether it is the leaves on the trees, the seasonal sports schedules, or the considerations for who brings the turkey and eggnog. With all the hustle and bustle of the upcoming holiday season, you may not be focusing on the required draw down of some of your life savings.
Individual Retirement Arrangements (IRAs) were created in 1974, and Required Minimum Distributions (RMDs) were required from the very beginning. RMDs are the minimum amounts that US tax law requires one to withdraw annually from traditional IRAs and employer-sponsored retirement plans. The purpose of RMD rules is to ensure that people do not accumulate retirement accounts, defer taxation, and leave these funds as an inheritance. RMDs force the holder to withdraw at least some of the funds as taxable distributions while they are still alive.
The rules apply to all employer-sponsored retirement plans, including profit-sharing plans, 401K, 403(b), and 457(b) plans. The RMD rules also applies to traditional IRAs and IRA-based plans such as SEPs, SARSEPs, and SIMPLE IRAs.
The age to start taking RMDs has changed over time. The current age to begin taking RMDs is 73 as of 2023, according to the SECURE 2.0 Act, which was an increase from the previous age of 72. For those of us born after 1960, we need to consider RMDs at age 75. Individuals are generally required to start taking withdrawals from their retirement accounts by April 1 of the year following the year they reach the required age.
There are penalties for failing to take RMDs or not taking a large enough distribution. The penalty is an excise tax of 25% of the amount not distributed as required, or 10% if the RMD is corrected within two years.
To some people, this requirement will not be as great of an issue if you are already drawing retirement needs regularly from your pre-tax savings; to others, it may cause an increase in taxable income that was not expected or needed.
This time of year, look at this future obligation. Maybe your required distribution is 2-3 years from now and you have room in your current tax bracket to explore other options. Many individuals consider ROTH IRA conversions to reduce the requirements at age 73. Others consider changing their annual tithing and donation expectations to have them come straight from the RMD qualified investments and go to the charities and churches of choice. Some may initiate a gifting effort to send this money in the direction of loved one.
When it comes to retirement, you have worked hard the last 30-40 years. You have raised your family, given everything you can to save for your golden years, and now it is time for you to be able to live more like every day is a Saturday.
This time of year, let’s be thankful. Let’s take pause to thank those that have served to provide for the rights that we hold so dear. Let embrace the spirit of family and friends. Don’t forget to reach out to your Financial Advisor to get some of these end of year “requirements” in order so there are no surprises, and you can walk into the New Year with a fresh start. Happy Thanksgiving.