FORECASTS & TRENDS E-LETTER
by Phil Denney
November 21, 2023

IN THIS ISSUE:

1.  RMD Rules for 2023

2.  Avoiding taxes on your RMD

3.  Review Your IRA Beneficiaries

4.  Roth Conversions

Overview

Ok, I can hear your eyes rolling  on this subject matter, but hopefully you will find the information useful. Keep in mind that the below information is not all inclusive.

RMD Rules for 2023

Required minimum distributions (RMDs) are the minimum amounts you must withdraw from your retirement accounts each year once you reach your RMD age. At that time you generally must start taking withdrawals from your traditional IRA, SEP IRA, SIMPLE IRA, and retirement plan accounts.

Beginning in 2023, the SECURE 2.0 Act raised the age that you must begin taking RMDs from age 72 to age 73 (it is now age 73 if born 1951-1959 and age 75 if born 1960 or later). If you reach age 72 in 2023, the required beginning date for your first RMD is April 1, 2025, for your first RMD in 2024. You will use the ending value of your IRA on 12/31/2023 for this calculation. The SECURE 2.0 Act changed some of the rules governing Required Minimum Distributions (RMDs). However, much remains the same. Here’s where things stand as of 2023.

The timing of your first RMD is based on your age. After Secure 2.0, individuals turning age 72 in 2023 will need to take their first RMD distribution for this year by April 1, 2025. Caution alert! I don’t recommend you wait until April 1 of 2025 to take your first RMD. If you turn 73 this year and wait until April 1, 2025, to take your 2024 RMD, you will have two RMDs to pay taxes on in 2025. You see the deadline for years after when your RMD starts will have an annual deadline of December 31. So you will also have to take your 2025 RMD (using the values on 12/31/2024) no later than December 31, 2025. Two RMDs in one year could push you into a higher tax bracket.

If you have more than one IRA account, you need to calculate your RMD for each account separately. However, you don’t have to take the RMD from each account. You can choose to aggregate your RMDs and take for as few as one of your accounts. Perhaps one of your accounts is down in a year and you want to keep its account specific RMD dollars at work for a potential recovery, you can choose to take that amount from one of your other better performing IRA accounts.

So how do you calculate your RMDs? You can go to your IRA custodian’s website, such as Charles Schwab to find an online calculator. All you have to do is input your end of year value, for a 2023 RMD the values on 12/31/2022, and your date of birth. If you prefer to calculate it yourself, you can use IRS Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs). You will find instructions and the applicable table you need to calculate your RMD yourself.

By the way, you can always take more than the RMD amount. It is the minimum required not the maximum required. Also, please don’t wait too late in the year to take your IRA distributions. I recommend no later than the end of November. IRA custodians get flooded with requests in December and there is no guarantee they will get them all done by year end. Murphy’s law says, if anything can go wrong, it will. Don’t procrastinate.

Avoiding taxes on your RMD

I get asked often about how to legally avoid income taxes on IRA distributions, such as an RMD. The simple answer, just give it away to your favorite charity(s). If the distribution goes direct to your charity, you won’t pay federal taxes on the distribution. It is called a Qualified Charitable Distribution (QCD). The only catch, you have to be at least 70 ½ and you are limited to no more than $100,000 for an individual or $200,000 for a joint filers.

Starting in 2023, donors can also direct a one-time, $50,000 QCD to a charitable remainder trust or charitable gift annuity as part of recently passed SECURE Act 2.0 legislation. And starting in 2024, annual QCD limits will be indexed for inflation. So with QCDs, more of your assets can be used to support your favorite charities that are making a difference.

The IRA assets go directly to charity, so donors don't report QCDs as taxable income and don't owe any taxes on the QCD, even if they do not itemize deductions. Some donors may also find that QCDs provide greater tax savings than cash donations for which charitable tax deductions are claimed. This is because adjusted gross income (AGI) is reduced, and that is used in several key calculations, such as determining the taxable portion of Social Security benefits or what deductions and credits donors qualify for receiving.

If you are a regular giver, you could choose to substitute a QCD for your giving from your regular income or taxable investment accounts. Something to think about.  

Review Your IRA Beneficiaries

At least annually you should review your IRA and/or retirement plan beneficiaries. It is especially important if there has been a life change, whether a deceased spouse or other beneficiary, as well as in the case of re-marriage. Blended families require special consideration. Please be deliberate in your selections. Do not assume it will all work out on its own.

There can be confusion on inherited IRAs by a non-spouse (also called beneficiary IRAs). If you inherit a traditional IRA from anyone other than your deceased spouse, you can't treat the inherited IRA as your own. This means that you can't make any contributions to the IRA. It also means you can't roll over any amounts into or out of the inherited IRA. However, you can make a trustee-to-trustee transfer as long as the IRA into which amounts are being moved is set up and maintained in the name of the deceased IRA owner for the benefit of you as beneficiary.

Like the original owner, you generally won't owe tax on the assets in the IRA until you receive distributions from it. You must begin receiving distributions from the IRA under the rules for distributions that apply to beneficiaries. Please see IRS Pub 590-B for specifics.

Roth Conversions

First of all, the amount you convert to a Roth IRA from a traditional IRA is taxable as ordinary income. It is highly recommended that you do not use the money in your IRA to pay this tax. You should use non-retirement money to pay the taxes.

Why should you consider a Roth IRA Conversion? You believe your tax bracket will be higher in retirement, you want to maximize your estate for your heirs, or you want to diversify your tax deferred assets. Also, there are no RMDs for a Roth IRA.  

We can usually assume taxes only go up, so there is always the possibility that tax brackets will be higher when we retire. Yet, keep in mind that your taxable income in retirement could actually be lower, while still maintaining the same lifestyle.

Sometimes the beneficiaries of an IRA are in a higher tax bracket than the IRA owner, so the IRA owner chooses to convert their IRA and can afford to pay the tax now. Some want to control when the taxes are paid.

What is the downside? You currently receive Social Security or Medicare benefits. If a Roth conversion were to increase your taxable income, then more of your Social Security benefits would be taxed and your Medicare costs could rise.

The rule book for the above is IRS Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs).  Please consult with your tax preparer on your specific tax situation.

Happy Thanksgiving Day!

Living in a time of confusion like we are now may require a conscious effort to find something to be thankful for this year. Maybe the following will help you find it. In 1 Thessalonians 5:16-18 we are told to, “Always be joyful. Never stop praying. Be thankful in all circumstances, for this is God’s will for you who belong to Christ Jesus.”

Turn off the television news programs and don’t go to their websites either. Watch your favorite sports teams and enjoy friends and family.

Sincerely,

Phil Denney

 

Source information:

IRS Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs)

Charles Schwab RMD Calculators

Charles Schwab Charitable Giving

 

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