TAX ADVISOR

Ed Slott

We need to stop thinking about minimums when it comes to retirement plan distributions .

AXPAYERS WITH THE LARGEST IRAS ( AND THEIR BENEFICIAries ) will be in higher tax brackets in the future , meaning that as their tax-deferred traditional IRAs continue to grow , so will the tax bill that eventually comes due . Doing nothing and allowing those amounts grow without tackling this problem is a bad plan .

The big changes wrought by the SECURE Act , specifically the 10-year rule affecting the rate at which people will have to unwind retirement assets in the future , should serve as a giant wake-up call , and a reminder that they should have been doing long-term thinking all along .

Reversing Course

The upshot is that advisors and their clients are going to have to make dramatic changes in their planning and embrace the idea that people with high incomes or ample assets — as well as those likely to be there in the future — should stop contributing to pretax 401 ( k ) s and IRAs .

What ’ s behind this reversal in traditional thinking about retirement tax planning ? For starters , there ’ s the realization that the tax deductions offered by such accounts are merely loans from the government that will have to be paid back at the worst possible time : in retirement . Worse yet , the payback may come from the accounts ’ beneficiaries , who in their peak earning years — and thus peak tax bracket years — could have to pay on the taxable retirement money they ’ ve inherited from their parents .

Though these inheritance issues have always existed , the original SECURE

Changes wrought by the SECURE Act , specifically the 10-year rule affecting the rate at which people will have to unwind retirement assets in the future , should serve as a giant wake-up call .

Act in 2019 managed to further change the game , forcing beneficiaries to take all the inherited retirement account money in 10 years . Previously , they could stretch the distributions over their entire lives , allowing the power of compounding to work its magic and potentially building up enormous account balances over multiple decades . But under the SECURE Act ( and the regulations that followed ), most non-spouse beneficiaries of retirement accounts must take total distributions within a decade . That 10-year rule shortens the window for complete depletion of all retirement funds . The shorter the window , the larger the required withdrawals — and the higher the resulting tax bracket .

Preferred Path

In the past , we ’ ve used a “ minimum ” mentality and let required minimum distributions , or RMDs , drive our tax planning . Instead , we need to think maximum : How much can be withdrawn now , and in the near future , at relatively modest tax rates ? It ’ s tax planning that should be driving our retirement account distributions . Even though the RMD age has been raised to 73 , doing nothing until age 73 is a mistake . That may result in more wealth generating inside traditional IRAs , which must be distributed by account owners and beneficiaries . Those distributions probably will be highly taxed , especially for people with large IRAs .

So the best thing is to not let RMDs

26 | FINANCIAL ADVISOR MAGAZINE | OCTOBER 2024 WWW . FA-MAG . COM