It’s the last of the summer mail bag, and this week, I’m focusing on the ever-popular topic of Required Minimum Distributions (RMDs).
As a reminder, the 2019 SECURE Act and its 2022 follow up, the Secure Act 2.0, changed the RMD ages from 70½ to 73 for individuals who turn 72 on or after January 1, 2023.
Seventy-three remains the age until 2033, at which time the age rises to 75. (To estimate your future RMD amounts, I suggest using this handy calculator from the SEC: https://www.investor.gov/financial-tools-calculators/calculators/required-minimum-distribution-calculator)
Q: I am in my mid-60’s and always thought that I should wait to pull money from my retirement account. Now I hear from many of my friends that waiting can create a problem. Can you explain why I should pull money before RMDs kick in?
A: For years, the idea was to delay withdrawing money from pre-tax accounts as long as possible. But as tax rates dropped and tax brackets expanded, there emerged a new thinking around the issue. In fact, there can be a benefit of taking distributions before Uncle Sam forces you to do so.
As an example, if you are waiting to claim Social Security until age 70, you might use your 60s as a time to slowly withdraw money from your retirement accounts, thereby keeping your highest marginal bracket at 12 or 22 percent. If you wait until RMDs, the amount of the distribution plus your Social Security benefit, may push you into a higher bracket and there is no guarantee that tax rates will remain at the current historically low levels.
Q: I have been retired for a number of years and have started taking RMDs from my 401(k). I have three funds within the account, and I’m wondering if I should take the RMD amounts equally from the three funds or spread it out?
A: I would take equal amounts from each fund that way you maintain your asset allocation. That said, if you know you’re going to have an RMD, you should make sure that the RMD amount is in the money market account at the beginning of each year, that way you don’t get burned if the markets tank.
Q: I am converting funds from my traditional IRA into my existing Roth IRA, so I can lower my future RMDs. Will the transferred funds be taxed as ordinary income? Is there a way to do this with no additional tax liability?
A: The government must be paid on untaxed money, therefore there is no way to avoid the tax on a Roth conversion. Therefore, whatever you take out of the traditional IRA will be treated as ordinary income when you file your taxes. Do make sure that you have some cash on hand to pay the taxes that will be due on the converted amount.
Q: I’m 46 years old and have just inherited a Roth IRA from my father. Dad’s broker just told me that I had to take distributions from the account. I thought that the whole point of my father using a Roth was that there would not be any required distributions. What gives?
A: While Roth IRAs are not subject to RMDs during the owner’s life, the rules change for non-spouse beneficiaries. For Roth IRAs inherited after 2020, you have to withdraw the money within 10 years of the owner’s death.
The good news is that unlike traditional IRA withdrawals, withdrawals of contributions from an inherited Roth are tax free, though the IRS notes: “Withdrawals of earnings may be subject to income tax if the Roth account is less than five-years old at the time of the withdrawal.”
Jill Schlesinger, CFP, is a CBS News business analyst. A former options trader and CIO of an investment advisory firm, she welcomes comments and questions at [email protected]. Check her website at www.jillonmoney.com.