Navigating RMDs in Retirement

As a retiree, you have worked hard to accumulate a significant nest egg over the course of your career. However, as you near retirement, you must navigate a series of financial requirements designed to make sure you're using savings appropriately. That's where Required Minimum Distributions come in.

When it comes to retirement plan distributions, IRS rules require everyone with a retirement account to take required minimum distributions (RMDs) once they reach a certain age. Since IRA distributions are usually taxable right away, the question of what to do with the money is often entwined with a desire to find tax-efficient strategies simultaneously. 

Here are some strategies to help you navigate RMDs as you transition to retirement.

Most—but not all—retirement accounts have RMDs, from individual retirement accounts (IRAs) to employer-sponsored plans. Those that do include:

• SEP, SIMPLE and traditional IRAs
• 401(k) plans, including Roth 401(k) plans
  403(b) plans
• 457(b) plans
• Profit-sharing plans
• Other defined-contribution plans, such as employee stock purchasing

RMD rules do not apply to Roth IRAs, which are funded with after-tax dollars. However, there's one exception: Upon the account owner's death, beneficiaries may be required to take an RMD from that account every year or face a penalty.

Understand the RMD Calculation

To determine your RMD, you need to calculate the amount you must withdraw based on your account balances as of December 31 of the previous year. The IRS has established useful resources online that specify life expectancy based on age and other factors, such as whether you are married and your spouse's age. It's important to note that your RMD amount will change from year to year based on changes in your account balance. Therefore, it's essential to recalculate your RMD amount each year to ensure that you are withdrawing the correct amount.

Here is the RMD table for 2023, based on the Uniform Lifetime Table of the IRS, which is the most widely used table. The IRS has other tables for account holders and beneficiaries of retirement funds whose spouses are much younger.

Retiree Age Distribution Chart

Retiree Age Distribution Chart

Source: Internal Revenue Service (IRS)

Consider Charitable Giving

The IRS provides assistance to those who prioritize charitable donations through qualified charitable distributions. This method allows for a direct transfer of up to $100,000 per year from an IRA to a qualified charity, which counts towards the RMD. While this option is available for both spouses, the $100,000 distribution allowance is not shared in joint returns. Therefore, if one spouse donates $75,000, the other can still donate up to the full $100,000.

Andrew A. Agemy, Founder and CEO of Agemy Financial Strategies, highlights that "Utilizing qualified charitable distributions can be an effective strategy for managing RMDs while also reducing taxable income."

This approach can provide significant benefits for those looking to optimize their retirement savings and support charitable causes.

Take Advantage of Roth Conversions

A viable option to explore is the conversion of a regular IRA to a Roth IRA. Traditional IRAs are funded with pre-tax dollars, while after-tax dollars fund Roth IRAs. Roth IRA payouts and capital growth are tax-free and can be inherited without inheritance tax. Additionally, Roth IRAs are not subject to RMDs, making them a smart choice for retirees.

According to Agemy, "Roth conversions are key when it comes to reducing taxes over the long term." The conversion process will require payment of income taxes on the IRA holdings, but it provides flexibility. The conversion doesn't have to include all assets in the regular IRA account, which maximizes tax efficiency. This is particularly useful if your tax rate is projected to increase in the future.

For those with substantial traditional IRA or 401(k) balances, converting some of those funds to a Roth IRA may be advantageous. This conversion offers the opportunity to avoid future RMDs and improve tax efficiency.

There are a few instances where you may be able to delay RMDs. These include:

• If you're still working at age 72, you don't have to take an RMD from your current employer-sponsored retirement plan until you fully retire. The employer's retirement plan document must also allow for this delay.

• If you are the business owner and don't own more than 5% of your company, RMDs are not required unless your ownership increases to 5% or more, or until you retire. The employer's retirement plan document must also allow for this delay.

• If your savings are in a Roth IRA, RMDs are not required. However, if you are a beneficiary of a Roth IRA, have other retirement plan accounts, such as a previous employer plan, SEP, SIMPLE or traditional IRA, RMDs are required.

Penalties are a consideration if you forget to take out your RMD. With the passing of Secure ACT 2.0 the missed RMD penalty dropped to 25% in 2023 and is dropped to 10% if fixed during the correction window.

Consult with a Financial Advisor

Retirees with substantial retirement account balances may find navigating RMDs to be a complex process. However, working with a Fiduciary Advisor can simplify the process by developing a comprehensive retirement income plan that includes RMDs, tax planning, and other critical factors.

The fiduciary advisors at Agemy Financial Strategies will work alongside you to strategize the best way to minimize taxes in retirement. We work tirelessly to provide a reliable retirement income stream that can withstand volatile market conditions, allowing you to enjoy the best possible retirement lifestyle.

If you're interested in learning more about navigating RMDs and planning for a secure retirement, contact us here today.