As a financial planner, I often talk to clients about required minimum distributions, or RMDs. It is a topic that confuses and angers clients at the same time.
Regardless of how one feels about the topic, we all need to be aware of how RMDs factor into our retirement plan. The Internal Revenue Service (IRA), over the past few years, has made several changes to RMD rules, and in late 2022, it made even more changes. These rule changes can offer relief in some areas, and generally speaking, I am in favor of them.
Individual retirement accounts (IRAs) were created in 1974 with the Employee Retirement Income Security Act of 1974. RMDs were a part of this legislation and were initiated because of the tax-deferred nature of IRAs. The IRS naturally wants its tax revenue, and allowing accounts to go tax-deferred forever prevents the IRS from collecting its tax. As a result, it created required minimum distributions. The IRS generates the RMD table based upon life expectancy, and that table dictates the withdrawal percentage. The IRS evaluates the IRAs value on December 31 of each year and applies the withdrawal percentage to that figure to determine the amount that needs to be withdrawn. It is important to note that these rules do not just apply to IRAs; they apply to all qualified accounts, excluding Roth IRAs and employer plans that are being contributed to currently.
The Secure Act of 2019 increased the age from which withdrawals were required from 70.5 to 72. Starting this past January, the Secure Act 2.0 increased the age again from 72 to 73. Now, individuals don’t need to start taking RMDs until age 73. This change applies to people who have yet to begin taking RMDs. The Secure Act also states that the RMD age will rise again in 2033, to 75.
An important factor relevant to this topic is the stretch IRA. None of these acts prevents a spouse from inheriting a deceased spouse’s IRA tax-free. At the death of your spouse, you are still able to inherit that IRA tax-free. You will pay taxes upon taking withdrawals. Non-spouse beneficiaries have a different set of circumstances — they can employ a stretch IRA. A stretch IRA allows for a child, for example, to inherit an IRA and not pay full tax on that money in the year they inherit it. They could historically stretch that over their lifetime, effectively minimizing the tax liability. The Secure Act of 2019 changed this too, allowing for a 10-year maximum stretch. The Secure Act 2.0 made no changes to this important estate planning tool, and that is unfortunate.
The views depicted in this material are for informational purposes only and are not necessarily those of Cetera Advisor Networks LLC. They should not be considered specific advice or recommendations for any individual.
Distributions from traditional IRAs and employer sponsored retirement plans are taxed as ordinary income and, if taken prior to reaching age 59 and a half, may be subject to an additional 10% IRS tax penalty.
This is designed to provide accurate and authoritative information on the subjects covered. It is not, however, intended to provide specific legal, tax, or other professional advice. For specific professional assistance, the services of an appropriate professional should be sought.
Jason LaBarge, financial advisor and president of LaBarge Financial
7 Riggs Avenue, Severna Park, MD 21146 · 443-647-4321. www.labargefinancial.com
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