Taking money out of a retirement plan requires thoughtful planning. Here are a few tips for withdrawals under new RMD rules.
Investing in a retirement account requires careful considerations, as does the strategic withdrawal of funds. The enactment of the Setting Every Community Up for Retirement Enhancement (SECURE) 2.0 Act in December 2022 ushered in changes to guidelines governing distributions from 401(k)s, individual retirement accounts (IRAs), and other retirement plans. While these rules have implications for almost everyone with a retirement account, individuals who have already reached retirement age may experience the most significant impact and may benefit from proactive planning to optimize their withdrawals.
What is an RMD?
Understanding Required minimum distributions (RMDs) is crucial. RMDs are mandatory annual withdrawals from specific retirement accounts including, profit-sharing, 403(b), 457(b), and 401(k) plans, as well as various types of IRAs (excluding Roth IRAs).1 The IRS mandates retirement account holders take annual RMDs. Failure to do so can incur in penalties, though the SECURE 2.0 Act reduced it from 50% to 25% of the required distribution amount, the penalty can be steep.
One notable change introduced by the SECURE 2.0 Act is an increase in the age when account holders must begin taking distributions. Effective January 1, 2023, the RMD age is now 73, up from 72. By 2033, it will further increase to 75. Individuals aged 72 or older before the passage of the SECURE 2.0 Act are unaffected and can continue with their previous RMD schedule.
Additional details about RMDs worth noting:
The first RMD, often referred to as the year-one RMD, must occur by April 1 of the year after you reach the RMD age. For example, if you turned 72 in 2023, then you must take your first RMD by April 1, 2024. After the first year, subsequent RMDs are due by December 31 each year. 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.
When should I take an RMD?
Deciding when you should take an RMD during the calendar year is a flexible choice. you have to decide for yourself or with the guidance of your advisor. Some prefer early withdrawals to help cover living costs or to cover a large expense, while others may opt for installments throughout the 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). Waiting until later in the year can provide a clearer picture of tax liabilities, especially considering potential changes in laws. You can withhold up to 100% of a distribution for tax purposes; however, taking the distribution early allows you to check the obligation off your to-do list, at least until the following year.
How to use an RMD
Once you’ve withdrawn an RMD, you can utilize it for various purposes. You can deposit it 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. Individuals over age 70½ can make a qualified charitable distribution (QCD) by moving a portion of the RMD (up to $100,000) directly from the IRA to a qualified charity.
As with most financial planning, navigating the timing of RMDs can be intricate and contingent on the larger context of an individual’s financial situation. The important thing is to remain proactive, making sure to avoid penalties for failing to take a required distribution. For personalized advice on navigating RMDs under the new rules, view our resources page here, or reach out to your advisor to discuss your options.
1“Retirement Plan and IRA Required Minimum Distributions FAQs,” Internal Revenue Service.
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