November means holidays ... and RMDs
November in our office is about more than just turkey and pie time -- November is also Required Minimum Distribution (RMD) season. With nearly 25,000 accounts in the firm, we process a lot of RMDs, and my good friend Bob suggested a column on the topic.
A Required Minimum Distribution is the annual IRS requirement to withdraw a certain amount from any tax-preferred retirement plan. These types of plans include IRAs, 401(k)s, 403(b)s, 457(b)s, SEP, SIMPLE, profit-sharing plans and TSP (Federal employees). A decent rule of thumb is: if you contributed to the plan on a pre-tax basis, it likely requires an RMD.
RMDs begin in the year the account owner attains the age of 73, unless you were born in 1960 or after -- then the RMD will begin at age 75, a rule that takes effect in 2033. These mandatory distributions used to begin at age 70½, then 72, but at this point everyone currently subject to this rule begins RMDs at age 73.
The amount required to be distributed is determined using an IRS life expectancy table and dividing the December 31 prior-year value of the account by a number representing the government's estimate of the owner's remaining life expectancy. I won't bore you with the calculation -- there are many easy-to-use calculators online -- but when I talk about the topic with clients, I generally estimate a beginning RMD at about 4% of an IRA's value, which is usually sufficient for conversation purposes.
While many of the folks we work with were originally pleased to be able to defer RMDs until age 73, with a few strong years of market performance and simply three more years to accumulate, we are finding RMDs becoming larger and therefore requiring more attention and planning.
The good news on RMDs is that with the passage of the One Big Beautiful Bill, the current tax environment is now the most favorable for retirees I've experienced in my career. As part of the effort to reduce taxes for those over 65, in tax years 2025 to 2028 married taxpayers will benefit from total tax deductions of up to $46,700, and single taxpayers up to $23,350.
In addition, tax brackets were restructured, and for a couple with total income of $100,000 -- with $50,000 coming from Social Security and $50,000 from pensions or retirement plans -- the average Federal tax rate can fall into the 4% range, with Indiana adding around 1.5%. In my opinion these favorable and temporary tax rules may provide a planning window to help manage future RMDs and avoid some of the other challenges that result from the additional income created by RMDs.
These challenges tend to be related to higher tax brackets and phased-out deductions from larger RMDs, and the potential to push a retiree -- especially a single retiree -- over the income threshold that causes Medicare Part B premiums to increase due to IRMAA (Income-Related Monthly Adjustment Amount) rules.
There are a couple tools available to help manage current and future RMDs. The primary tools are Roth IRA conversions and Qualified Charitable Distributions, but by far the most valuable tools are awareness and time.
Roth IRAs do not require RMDs, but the process of converting a Traditional IRA to a Roth IRA is taxable. Considering the favorable tax rules in place for the next few years, and given enough time to spread out the income from conversion, sometimes choosing to pay taxes before you have to means paying less in total over time. If we can have a conversation about an incremental Roth IRA conversion strategy between the ages of 65 and 71, future RMDs may be greatly reduced or even eliminated -- enabling more tax control for those who have reached RMD age.
For those currently subject to RMDs where the distribution is having negative tax and Medicare premium consequences, consider the Qualified Charitable Distribution (QCD). The QCD enables those subject to RMDs to give part or all of their RMD to a qualifying charitable organization (up to $105,000 in 2025) and not have that amount included in taxable income. For those attempting to gain control over their RMD situation, the QCD can be a powerful solution.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Stock investing includes risks, including fluctuating prices and loss of principal. No investment strategy can guarantee a profit or preserve against loss. Past performance is not a guarantee of future results. Marc Ruiz is a wealth advisor and partner with Oak Partners and registered representative of LPL Financial. Contact Marc at marc.ruiz@oakpartners.com. Securities offered through LPL Financial, member FINRA/SIPC.
