By A new requirement for minimum distributions (RMDs) from retirement accounts has become even more confusing this year. Many older adults are unaware that they must start withdrawing funds from their retirement accounts in their early 70s and pay income taxes on these withdrawals. This requirement allows the government to finally collect taxes on retirement savings that have grown tax-deferred for decades. However, even those who are aware of the requirement may not know when it begins, as the age for RMDs has been continuously changing.
Historically, individuals were required to start taking RMDs at age 70 ½. However, the Secure 1.0 law of 2019 raised the age to 72. Then, the recently implemented Secure 2.0 in 2022 further increased the age to 73, effective this year. By 2033, the age will be raised again to 75.
Financial advisor Juan C. Ros from Forum Financial Management in Thousand Oaks, Calif., acknowledges that there is always confusion surrounding this topic, especially now that the age has increased twice in just four years.
Fortunately, Secure 2.0 provided some relief to individuals turning 72 this year. They are not required to take their first RMD until April 1, 2025. This extension is granted to first-timers, giving them until April 1 of the following year to make their withdrawal for the year they reach the threshold age.
To clarify, the recent change affects individuals born in 1951 or later. Baby boomers born between 1951 and 1959 must start their RMDs at age 73, while those born in 1960 or later will have an RMD age of 75.
Retirement Account Withdrawals and Required Minimum Distributions (RMDs)
Brokerage houses play a crucial role in tracking legislative changes and informing clients about their RMD requirement, say financial advisors. However, there’s an important caveat that individuals need to be aware of, according to Stacy Miller, a certified financial planner in Tampa. While brokerage firms have information about the money held with them, they may not have knowledge of funds spread across multiple institutions. In such cases, individuals will need to calculate their RMD themselves or seek guidance from a financial advisor.
The Importance of Accurate RMD Withdrawals
Failure to withdraw the required minimum distributions can lead to penalties. Previously at 50%, the penalty has been reduced to 25% under Secure 2.0 legislation. Furthermore, account owners have the opportunity to reduce the penalty further to 10% by promptly resolving the issue and withdrawing the required amount.
Charitable Donations as an Alternative Solution
For individuals who don’t rely on their RMDs for living expenses, there is an appealing option available. They can choose to make a tax-free charitable donation of up to $100,000 (or up to $200,000 for married couples filing jointly) to satisfy their RMD requirement. This can be achieved through a qualified charitable distribution (QCD) directly from an individual retirement account (IRA) to a qualifying charity. Importantly, the donated amount does not count towards the donor’s taxable income. Besides fulfilling the RMD obligation, this strategy can be advantageous for higher-income earners as it helps them avoid entering a higher tax bracket or paying income-adjusted Medicare premiums.
Planning Opportunities and Confusion around RMDs
While the age for RMDs was adjusted upward, decoupling the age for QCDs from the RMD age creates both confusion and planning opportunities. Laura Jansen, a senior wealth advisor with Ironwood Investment Counsel in Scottsdale, AZ, highlights this aspect. Jansen’s clients, for instance, have chosen to start their QCDs at 70 ½ in order to proactively spend down their IRAs and reduce their future RMD obligations while concurrently making charitable contributions.
As individuals navigate the intricacies of RMDs and retirement account withdrawals, it is important to understand the limits of brokerage firms’ knowledge and seek additional guidance when necessary.
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