Should I Reconsider My Retirement Minimum?
Recently the rules for taking required minimum distributions from retirement accounts changed. There were several changes, but note that beginning in 2023, the age to start taking RMDs jumps from 72 to 73 and in 2033 it creeps up again to 75.
Remember, the current lower tax rates instituted in 2017 are set to increase after 2025 if no further action is taken. Therefore, depending on your own circumstances, it may be beneficial to utilize one or more of the following strategies. You should definitely consult with your accountant and your financial adviser before implementing any of these.
If your income tax rate is not very high now, then a Roth conversion could be a good long-term strategy for your future tax-free income. Of course, you can do a Roth conversion at any age. If you can put money into a Roth option in your company retirement plan, then you may also want to consider doing that.
QCD’s Can Be Your Friend
QCDs can be made starting at age 70 ½, while RMDs don't start until 73 now. In practical application, this means that if you already make qualified charitable contributions then making them tax free from your IRA can reduce the amount of taxable distributions you will need to make from the IRA in the future. The annual QCD limit is $100,000 per person, not per IRA. There are also other rules regarding QCD’s to discuss with your tax adviser.
It’s Only the Minimum Requirement
The current relatively low tax rate environment may make it advantageous to begin taking distributions from your retirement account now. After 59 ½ you may take funds from your retirement account with no penalty, only income tax payments. Discuss with your tax advisers how much you can take and be at the lowest tax rates.
Inherited IRA’s Have Their Own 10-Year Rules
Most beneficiaries will have to fully withdraw inherited funds within 10 years after death, and now under the new interpretation by the IRS the distributions must begin to be taken each year starting in 2023. With these short windows, more retirement assets will be bunched into a higher tax bracket, leaving most non-spouse heirs with less. Many of these heirs may themselves be in their high earning years when they inherit. Note also that inheriting a Roth IRA has the same timing rules, but there are no taxes on the distributions!
- If you can get some retirement funds out at the low 2023, 2024 and 2025 rates, then that may be beneficial;
- Distributions via Roth Conversion may also be beneficial in this lower tax environment;
- If you contribute to a qualified charity, then after the age of 70 ½ you may do that directly from your IRA with 0% taxes; and
- Given the 10-year rule for inherited IRAs any of the aforementioned strategies may enable you to leave more tax-free funds to your heirs.
These strategies may not be for everyone, but it is worthwhile to explore them with your tax consultant.