Taking money out of a retirement plan requires thoughtful planning. Here are a few tips for withdrawals under new RMD rules.
Putting money into a retirement account requires thoughtful planning. And so does taking it out. When the Setting Every Community Up for Retirement Enhancement (SECURE) 2.0 Act was signed into law in December 2022, guidelines governing distributions from 401(k)s, individual retirement accounts (IRAs), and other retirement plans changed. While the new rules have implications for nearly everyone with a retirement account, those who have already reached retirement age could see the biggest impact and may want to plan proactively to optimize their withdrawals.
Required minimum distributions (RMDs) are annual withdrawals from specific retirement accounts: profit-sharing, 403(b), 457(b), and 401(k) plans, as well as different types of IRAs (with the exception of Roth IRAs).1 IRS rules require that retirement account holders take annual RMDs, and the penalty for missing a distribution can be steep (although the SECURE 2.0 Act reduced it from 50% to 25% of the required distribution amount).
Another notable change implemented by the SECURE 2.0 Act was an increase in the age when account holders must begin taking distributions. Starting January 1, 2023, the RMD age is now 73 (up from 72). In 2033, it will increase again, to 75. Individuals who were 72 or older prior to the SECURE 2.0 Act’s passage are not affected and can continue to take RMDs as previously scheduled.
Here are a few other details about RMDs that are worth noting:
A retiree’s first distribution must occur by April 1 of the year after they reach RMD age. For example, if you turned 72 in 2022, then you must take your first RMD by April 1, 2023. After the first year, the RMD due date is December 31. Since the first RMD isn’t due until April of the following year, you have some flexibility regarding the timing of your first withdrawal, but taking two RMDs in a single year can have tax implications.
Delaying the first distribution often stems from changes in income between the first-year RMD and the second-year RMD. Examples include the sale of a house or business, employment income, and high realized capital gains. Talk to an advisor if you’re nearing age 73 and need guidance on the timing of your first RMD.
There’s no fixed rule for when you should take an RMD during the calendar year; you have the flexibility to decide for yourself or with your advisor. Some opt to take an RMD at the beginning of the year to help fund their living costs or to cover a large expense. By taking the distribution early, you can check the obligation off your to-do list, at least until the following year.
You can also take an RMD in installments, or over the course of a year. This can be a good option if you prefer to receive a monthly “retirement paycheck” rather than an annual distribution (akin to a pension or an annuity). You can also withhold taxes from your RMD, to avoid a higher tax bill in April.
Some prefer to wait until later in the year to take an annual distribution because laws are subject to change at any time. For example, the benefit of waiting was highlighted in 2020, when the CARES Act waived the distribution requirement for that year. Anyone who’d already taken their annual distribution had to decide whether to keep it or go to the trouble of returning it to their retirement account. Another reason to wait until later in the year is to gain a sense of your overall tax liability and use the distribution to pay some of the estimated tax. You can withhold up to 100% of a distribution for tax purposes.
You can deposit an RMD in a checking or savings account if you intend to use it for cash flow or large expenses. If you have sufficient cash flow, you can deposit the funds into a taxable investment account, allowing you to reinvest those funds in the market. Folks over age 70½ can also make a qualified charitable distribution (QCD) and move a portion of the RMD (up to $100,000) to a qualified charity.
As with most financial planning, the timing of taking an RMD can be complicated and contingent on the larger context of an individual’s financial situation. The important thing is to remain proactive, making sure to avoid a steep penalty for not taking a required distribution. If you’d like advice on the timing of taking an RMD under the new rules, view our resources page here, or reach out to your advisor to discuss your options.
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