Chris Briscoe at Girard , a Univest Wealth division , in King of Prussia , Pa .
The higher distribution signifies that a client ’ s retirement accounts have “ recovered a good amount of the assets they withdrew the prior year ,” says Matthew Pastor at Johnson Brunetti , an Alera Group company , in Hartford , Conn .
The Bad News
But the extra cash can also be a problem , especially for “ people who have other income and do not need all of the RMD to finance their lifestyle ,” says Bob Schneider of Johnson Financial Group in Milwaukee .
It will push some of these clients into a higher tax bracket . Not only could it trigger higher taxation of Social Security benefits , explains Aaron White at Adero Partners in Pleasanton , Calif ., but it might force a surcharge on future Medicare premiums , which are based on past income .
“ For affluent clients , the burden is more pronounced … potentially exposing them to the 3.8 % surtax on investments ,” White continues , referring to an extra tax on net investment income for those whose modified adjusted gross income exceeds $ 200,000 ( or $ 250,000 for married couples ).
Lower income clients could suffer , too . “ The additional income may impact their ability to qualify for subsidies for health insurance or reduced property taxes ,” says Mike Kazakewich of Coastal Bridge Advisors in Westport , Conn .
What ’ s more , the bigger withdrawal decreases the client ’ s total retirement portfolio and its future growth potential .
QCDs But advisors insist that careful planning can help clients be better prepared .
One option for reducing the taxes on high RMDs is to use qualified charitable distributions , which allow you to transfer withdrawals from a retirement account directly to 501 ( c )( 3 ) charities . This year , the limit on such transfers has been raised to $ 105,000 .
Up to that amount , you can “ gift the entire RMD to eliminate its tax consequences ,” says Bradley Newman at Fort Pitt Capital Group in Harrisburg , Pa . The funds don ’ t count toward a client ’ s adjusted gross income and won ’ t trigger Medicare surcharges or the 3.8 % tax on investments for wealthy clients , he says .
Qualified charitable distributions can be made from IRAs by anyone who is 70½ or older , he adds , and can therefore be used to reduce IRA balances before required minimum distributions go into effect .
Roth Conversions
Another strategy is to convert some retirement-account funds to Roth IRAs . You have to pay income tax on the conversion , because Roths are funded with after-tax dollars , but the move could reduce the size of the retirement accounts and therefore the size of future required minimum distributions — but only future RMDs , not current ones , advisors say . concurs . “ Roth conversions are ideal for reducing future taxes when looking ahead at large RMDs ,” she says . “ The opportunity for these occurs during the sweet spot after a client retires but before RMDs kick in .”
In other words , plan ahead . “ This high RMD year really highlights how important it is to spend some time planning around current needs and future needs ,” stresses Ben Rizzuto at Janus Henderson Investors in Denver .
Special Circumstances
There are a few other special circumstances that may affect clients ’ required distributions .
“ Those still employed are exempt from taking RMDs from their employer ’ s plan [ unless they own 5 % or more of the business ] but are still required to take the RMD from any IRAs ,” says Angie O ’ Leary of RBC Wealth Management in
“ Roth conversions require paying more taxes up front . But you can ’ t use RMD money for Roth conversions , so it needs to be done before RMD age to be really effective .”
— Kelly LaVigne , Allianz Life Insurance
“ Roth conversions require paying more taxes up front ,” says Kelly LaVigne at Minneapolis-based Allianz Life Insurance Company of North America . “ But you can ’ t use RMD money for Roth conversions , so it needs to be done before RMD age to be really effective .”
Clients should only pursue this option if they have “ access to outside , after-tax funds to cover the tax burden ,” cautions Matthew Spradlin at Steward Partners in Midlothian , Va .
And this year isn ’ t the best time for Roth conversions — they ’ re best done in lower RMD years , says Scott Benner of KBBS Financial in Seattle . High-distribution years like 2024 , in fact , show how such conversions smooth taxation over five to 10 years , he says .
Kristina Mello at StrategicPoint Investment Advisors in Providence , R . I .,
Minneapolis-St . Paul . In some cases , she says , you can “ roll over other tax-deferred accounts into your employer ’ s 401 ( k ).”
Another consideration is whether the required distributions come from inherited IRAs . According to the SECURE Act 2.0 , all funds in inherited IRAs must be fully distributed by the end of the 10th year after the original owner ’ s death , unless the heir is a spouse , a minor dependent child , disabled , or otherwise determined to be an eligible designated beneficiary . ( If the original owner ’ s death occurred in 2019 or earlier , the funds must be withdrawn within five years .)
“ There is confusion , however , as to whether there are RMD requirements before year 10 ,” says Lisa Featherngill of Comerica Wealth Management in Winston-Salem , N . C . “ The IRS is supposed to provide guidance this year .”
MARCH 2024 | FINANCIAL ADVISOR MAGAZINE | 55