Brace Yourself for Higher RMDs in 2024

#Morningstar  #EdSlott #RetirementPlanning

Following a banner year in the stock market, investors subject to required minimum distributions could be in for a nasty tax surprise, Ed Slott says.

00:00 Introduction
00:16 Required Minimum Distributions
04:45 Larger-Than-Expected RMDs in 2024
10:46 Tax Implications of Required Minimum Distributions
12:35 Can Converting to a Roth Reduce Future RMDs?

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[flyfliker]

Fidelity informs me of my RMD obligations and I choose to withhold the required taxes. Easy.

[georgesealy]

My yearly process is to take my RMD on Feb 1st. I take only what the RMD amount is, and I have withholding taken out. Then I reinvest the RMD to create as much income as possible to offset the tax being paid on the RMD. My accountant also provides the 4 estimated tax payments to be made during the year taking everything into consideration. This system works well for me.

[filly]

The BIG PROBLEM is not paying the tax on the RMD, the BIG PROBLEM is when that RMD puts your income over the Social Security tax threshold so you wind up paying tax on 50% or 86% of your Social Security Benefits. The thresholds are set WAY TOO LOW for the government to be able to tax 50% OR 86% of your Social Security benefits.
The first threshold for married filing jointly is currently $34, 000 - so if half of your Social Security and ALL OF YOUR OTHER TAXABLE INCOME total over $34, 000 but under $44, 000, you will have to pay Federal (and probably State tax, depending on your state) on 50% of your Social Security. The second threshold for married filing jointly is currently $44, 000 when you'll pay tax on 86% of your Social Security and the rest of your taxable income. it SUCKS. Especially now with inflation going through the roof. We're afraid to invest any of our non-IRA savings for fear of the earnings on those investments pushing us over one of those thresholds and us getting hit with a fat tax bill because they're taxing 50% or 86% of our Social Security. We have no issue with paying tax on any other income, but we greatly resent being limited in or afraid to invest our personal savings for fear they'll slap a tax on our Social Security benefits because we've crossed one of those far too low thresholds.
EXAMPLE: If a married filing jointly couple brings in $48, 000 a year in Social Security, that means the feds count half of it ($24, 000) plus all other taxable income (which INCLUDES RMDs), and if that $24, 000 plus all other income plus RMDs total more than $34, 000, they'll be taxed on that $24, 000 along with all of their other income and RMDs. If they cross the $44, 000 threshold, they'll get taxed on 86% ($41, 280) of their Social Security as well as all of their other income and RMDs!

It's outrageous that two retired people that get a combine amount of $4, 000 a month ($48, 000 a year) in Social Security (which is LESS THAN THE $14 AN HOUR ($58, 240 PER YEAR) MINIMUM WAGE FOR 2 WORKING PEOPLE) could potentially get hit with a tax bill of over $5, 000 to over $10, 000 just because they hit one of those WAY TOO LOW thresholds. Think about it: Two married and UNRETIRED workers each making $14 an hour MINIMUM WAGE make $58, 240 a year, yet two married retired people on $48, 000 a year in Social Security benefits get slammed with a tax bill on 50% of their Social Security ($24, 000) for making over (roughly) $833 A MONTH in any other kind of income, including RMDs. If they make $1, 667 A MONTH in any other kind of income, including RMDs, they'll be taxed on 86% ($41, 280) of their Social Security. And they don't even get to deduct the Medicare premiums or its deductibles! IT'S JUST WRONG, especially when you can't even itemise to get a tax bread on premiums, deductibles, and any other healthcare (including dental) costs unless it's over your standard deduction which for married filing joint in 2023 was $27, 700, which is 57.7% of their $48, 000 Social Security benefits!

Loggins and Messina had it right when they said Uncle Sam has his hands down in your pants (and it doesn't matter if you're too old or too sick to work, either).

[TheSmartLawyer]

If you're investing your entire adulthood, and you have to take RMD at age 73 years old that is a great problem to have and you should enjoy the money before you die

[bettydillingham]

My RMD totally goes straight to a charity so I don’t incur any taxes on this withdrawal. I take it out in the first two months of the year and it’s all over for the year. Works great for me.

[juliahelland]

Great interview! I really learned a lot. Thanks for sharing! 💯

[fasst]

What is the problem with taking money out of your IRA. I am 68 and have been taking money out of mine since the early withdrawal penalty stopped at age 59 1/2. The money is for spending in your retirement. Not to leave in there until you die. You have been paying income tax your whole life. So you have to pay some taxes out of your withdrawals. You are probably going to be in lo lower tax bracket then you had real income anyway.

[saltyroe]

My tax professor said look at total return, not just tax avoidance. In general you are always better off to delay withdrawing tax sheltered retirement funds. This usually means taking the minimum withdrawal so the balance can earn tax free. The idea of having withholding on your withdrawals is a good simplifyer

[TheGordyb]

We take our RMDs in January as our travel budget. Our taxes on that money has been 12% the past few years against 20% plus when we deferred that income. Working for us.

[seenyourmama]

I am fortunate that I don't need my RMD during the year so I apply late November. The RMD is delivered in early December as stock into a brokerage account previously established. I have more than required for taxes deducted at that time. I do not file EST during the year and I usually receive refunds in late April. The RMD is still invested in the Market...winner, winner!

[keithmachado-ppfv]

I will happily pay the taxes on money I am blessed to not need if I am lucky enough to live to 75+ when the RMDs kick in.

[oyqppqi]

One way to reduce your RMD tax liability is a QCD (Qualified Charitable Contribution) which counts toward the RMD.

[dmulvany]

I think one potential approach to take would be to buy fixed income securities at a level that would more than cover the projected RMD that would mature inside the taxdeferred account and maybe have it continue to earn interest until December 1st or so. Then take the RMD from that cash, take 20% withholding from it, and that withholding will cover the tax obligations for the year.

For example, if your first RMD is at age 73, buy TIPS five or ten years in advance that would mature that year and in sufficient quantity to cover your estimated taxes. You’ll have all the principal available as well as the interest collecting during that time. This would free you from having to sell a stock or fund that might be depressed that year.

The other strategy to take would be to try to convert a great deal of your tax-deferred accounts (TDA) to a Roth IRA, but not necessarily all of them. The TDAs can still be useful for funding deductible expenses like long term care that’s not covered by Medicare.

[BarnabyBarry]

Good info-Why would you take fed tax withholding and you could lose investment opportunity (assuming you have adequate funds) as my dad would say! Plus why wait for a potential check from the IRS just pay it on 4-15!

[psdaengr]

If the value of your investment /pension accounts DIDN'T rise last year, to get back to pre-2020 levels, you were a lousy investor and it would be a bigger problem.
Getting more money as your RMD and paying taxes FROM the increase shouldn't be a surprise- unless you are lazy. Every company holding an IRA or 401k lets you know in January what it will be for the nexfuture increases t year - while you are still preparing the previous year's tax return! That means you can plug in already-calculated RMD and see the tax effect A YEAR BEFORE the higher bill comes due. (Estimated payments are based on the previous year's return). Just add half the rate of inflation to your social security payment and any decent tax software, will show you next year's approximate total tax payment.
Put whatever you don't need of the RMD into a brokerage account, and if your retirement accoutas are well thought out, it will rise as fast as they do. A non-retirement account doesn't have RMDs future RMDS, and LTCG are taxed at lower rates when you do draw from them.

[teams]

My RMDs start at age 75. I am taking monies out each year before then. I am 63. I just trying to make sure I stay under IRMAA when I am 65.

[pd]

If the value of your tax-deferred accounts goes down, your RMD can be less than the previous year.

[kjisnot]

I still have a few years to go for RMD. Do investment companies (Empowerment for me) holding the 401k calculate the amount for you? Do they typically charge fees for the distributions? I assume it's always done in a lump sum.

[princesskaitlinhazelwood]

That is a good idea to do 100% withholding.

[frankkeel]

What are the penalty percent on non with holding?