- For certain retirees, the deadline for taking mandatory distributions from their retirement accounts is drawing near — and those who do not require the funds have alternatives.
- Starting in 2023, most retirees will be obligated to withdraw required minimum distributions, known as RMDs, from their pre-tax retirement accounts once they reach the age of 73.
- If your cash flow is sufficient without Required Minimum Distributions (RMDs), you might want to explore making Qualified Charitable Distributions or channeling the funds into brokerage accounts featuring tax-efficient investments like exchange-traded funds.
For certain retirees, the due date to withdraw
required withdrawals
from
retirement accounts
is coming near — and individuals who aren’t financially strapped have choices, according to experts.
Starting from 2023, the majority of retirees have been required to take
required minimum distributions
RMDs from pre-tax retirement accounts beginning at age 73.
The initial deadline for taking Required Minimum Distributions (RMDs) is April 1 following the year you turn 73. In subsequent years, retirees must withdraw their RMDs by December 31 each year.
The subsequent phase invariably hinges on an individual’s specific objectives along with their fiscal and tax strategy,” explained Judy Brown, a certified financial planner and partner at SC&H Group—a firm based in both the Washington, D.C., and Baltimore metro regions. Additionally, she holds certification as a public accountant.
Before making decisions about an RMD, it’s crucial to take into account both your immediate and future objectives, as well as any aspirations for leaving a lasting impact, alongside the
tax impact
, experts say.
Reinvest for future reductions in taxes
If you’re looking for long-term expansion, you have the option to put your after-tax Required Minimum Distribution (RMD) funds into a brokerage account and maintain your present investment approach, as suggested by CFP Abrin Berkemeyer from Houston.
Once those assets are sold, you will receive
long-term capital gains rates
ranging from 0%, 15%, or 20% after keeping the assets for over a year. This rate varies depending on your taxable income.
This approach “might result in subsequent tax benefits” if you utilize the funds for a significant expenditure at a later date, like
health care
According to Berkemeyer, who serves as a senior financial advisor at Goodman Financial, brokerage assets may be liable for capital gains taxes, while pre-tax retirement funds are subjected to ordinary income tax rates.
ETFs are remarkably tax-efficient.
Certain advisers employ “in-kind transfers” to shift assets directly from your pre-tax retirement account into a brokerage firm, allowing you to remain invested in the initial securities. However, you will still be liable for taxes on this withdrawal, even though your initial investment portfolio remains intact.
Nevertheless, there are valid justifications for avoiding the storage of duplicate assets in a brokerage account, where earnings are subject to annual taxation, according to CFP Karen Van Voorhis, who leads financial planning at Daniel J. Galli & Associates in Norwell, Massachusetts.
For instance, you might consider reallocating your investments to
exchange-traded funds
Because they are “extremely tax-efficient,” she stated.
Unlike mutual funds, most ETFs do not.
distribute capital gains payouts
, potentially reducing the annual tax liability for brokerage account holders.
Obtain a ‘locked-in tax reduction’
If you’re philanthropic, another option could be a so-called
qualified charitable distribution
, or QCD, which involves a direct transfer from an individual retirement account to an
eligible nonprofit organization
.
In 2024, retirees who are 70½ years old or older may contribute up to $105,000, fulfilling their annual Required Minimum Distribution (RMD) obligations for individuals aged 73 and over.
There isn’t a charitable deduction, however, Qualified Charitable Distributions (QCDs) aren’t included in your adjusted gross income. This means retirees can benefit from this without needing to itemize their deductions for tax advantages.
“Effectively, this ensures a tax deduction,” Van Voorhis stated.
Higher adjusted gross income might lead to additional tax concerns, like increased income-related monthly adjustment amounts, known as IRMAA, for instance.
Medicare Part B
and Part D premiums.
