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Preparing For Higher RMDs This Year
A good year in the markets also means higher required distributions from retirement accounts .
By Ben Mattlin
LAST YEAR ’ S STRONG MARKET PERFORmance means this year ’ s required minimum distributions ( RMDs ) are likely to rise for many retirees . For some , that ’ s good news . For others , not so much .
Here are advisors ’ suggestions for how to best prepare , whatever your client ’ s situation .
How RMDs Work RMDs , of course , are the amount of money people 73 and older must withdraw from their tax-deferred retirement accounts by year ’ s end . ( Note : The RMD age increased this year .) These distributions are calculated by dividing a retirement account ’ s returns at the end of the previous year by the account holder ’ s current life expectancy .
“ The life expectancy factor decreases every year , so that — combined with a larger year-end balance — means higher RMDs ,” explains Kevin Brady of Wealthspire in New York City . He adds that the S & P 500 was up roughly 24 % in 2023 while U . S . bond markets rebounded more than 5 %.
To be sure , some clients won ’ t face a distribution increase . “ For those who were heavily weighted in tech or in index funds , the gains may be much larger than [ it was for ] those who were heavily weighted in value stocks ,” notes Jennifer Kim of Signature Estate & Investment Advisors in Los Angeles .
But after 2023 ’ s robust returns , “ you would be hard-pressed to find someone with a smaller distribution in 2024 ,” says Dustin Wolk at Crescent Grove Advisors in Milwaukee .
Differing Opinions
Advisors say that some clients should be celebrating . “ A higher RMD is good news for everyone — individuals , households and the local economy ,” says John McCafferty , director of financial planning at Edelman Financial Engines in Alexandria , Va .
The other side of the argument : “ RMDs are never good news ,” says Dean Catino of Monument Wealth Management , who ’ s also based in Alexandria . “ By definition , the account owner is being forced — required — to withdraw from their retirement account , and that withdrawal [ comes ] with taxes at ordinary tax rates .”
However , he adds , it ’ s important to remember that the retirement accounts have been growing at a compounded , tax-deferred rate “ often over several decades . Now that is good news !”
The Good News
For clients who use their required minimum distributions to help pay for living expenses , this year ’ s increase is a bonus . “ RMDs can be used in positive ways , like reducing debt , building cash in the emergency fund or investing the excess ,” says
54 | FINANCIAL ADVISOR MAGAZINE | MARCH 2024 WWW . FA-MAG . COM