2023 EP0218 | Financial Updates W/ Peter Richon and Erin Kennedy | 3 RMD Changes For 2023

We want you to plan for success. Welcome to Planning Matters Radio.

Peter, really good to see you. Today we're talking about three RMD changes for 2023. So we're going to break down the key changes to required minimum distribution rules that went into effect January 1st. And the first one, of course, it's hard to keep up with all these changes.

We did recently talk about Secure Act 2.0, but in Secure Act, the original in 2019, the starting age has increased yet again. What do we need to know? Yeah, well, it seems like the government and the IRS are also a little confused. There was a lot of gray area here. And it's a classic example of we have to pass it to see what's in it.

And then we have to live it and make mistakes with it to define what it really means. So bottom line is your RMD is a required minimum distribution. You are required to remove dollars from your tax deferred account because eventually the IRS needs to collect their pound of flesh.

Right. This past generation of Americans have participated in a 401k where they've been allowed to delay, defer and kick their tax bill down the road. Some of us end up in retirement, not really needing the money, but you have an unpaid bill and liability to the IRS.

They require minimum payments on. And so they have been pushing this back a couple years over the last several years. The Secure Act original version one was passed in 2019, and now the Secure Act 2.0 was was passed at the end of 2022. And it pushed that required minimum distribution so that the IRS could collect their tax dollars back. It was 70 and a half. Then it was 72. And now it's 73. Eventually it'll be 75. But which year those are defined as moving is still kind of up in the air. And I think they'll come back and and make a stricter, stricter definition when it eventually does move to 75. But just because you can continue to defer, Aaron, I'm not sure that means that you should continue to defer.

If you are truly a proactive planner trying to do the best thing for you and your family's financial future. Talk a little bit more about that. Always about those strategies.

All right. The second change here, this one is kind of good news, right? The penalties. If you miss those RMDs, they're lower.

Yeah, lower. Fantastic. But it's still a penalty, which means unnecessary money coming out of your pocket and going to the IRS. And we don't like when that happens. So let's just avoid those penalties. Stay on top of this and make sure that we take those RMDs on time or ahead of schedule. I like ahead of schedule right now because if nothing is done, taxes do go up in just a few short years. So once again, just because you can defer and delay a few extra years doesn't mean you should.

You'll probably get a better deal if you start removing a few dollars from those tax deferred accounts now. Although that does take some number crunching to make sure that that is the case. All right. So the SECURE Act changed how inherited IRAs are treated and made things somewhat confusing by creating separate rules for IRAs inherited before 2020 and those inherited after 2020.

What do we need to know? Right. Yeah. If you inherited an IRA prior to January 1st, 2020, then you're under the old rules.

Right. And when the government changes the rules, what they do is they grandfather in people who did certain things under the old set of rules and say those rules still apply to you. But January 1st, 2020, new rules went into effect. So anybody who inherited an IRA after that point in time has to liquidate that account with just a few exceptions within 10 years. And those are called eligible beneficiaries.

Those exceptions, you need to check your specific set of circumstances to see if one of those rare exceptions does apply to you. But most people who have an inherited IRA that was maybe saved by their parent or grandparent and passed to them have to liquidate that account within 10 years. Basically, what the IRS did with this was say that your retirement account is for your retirement and we're going to make it one of the worst generational wealth transfer tools available. And by the way, I still see people who have IRA trusts that were set up prior to the original SECURE Act in 2019 have not updated their plans. That might be one of the worst tax moves of all, because all of that income passes at trust rates rather than individual rates. Even if it's not in a trust and it's passing generationally is probably going to push your beneficiaries into much higher tax brackets. And the IRS ends up being your largest beneficiary, which again, Erin, is why proactive planning and updating your plan to reflect these rules and law changes is so vitally important to making the most out of each and every dollar and keeping the most of them. Right.

So let's dive just a little bit deeper into that question. And I have this visual, Peter, which hopefully you can walk us through, because it sounds like what you're saying is that the major difference for accounts inherited after 2020 is that the five year rule becomes the 10 year rule and non spousal beneficiaries get broken up into two categories. Eligible designated beneficiary and designated beneficiary. Right. Yeah. If you leave your IRA tax deferred account to a church charity organization, if you left it to your state, you didn't name beneficiaries.

Wow. Is that a large oversight and big mistake? You should always have beneficiaries. If you had certain types of trust, the money has to be liquidated within five years.

Those are actually kind of more rare instances, but but they do happen with some frequency. And there are much better ways to plan effectively if that is one of your goals. But if you are a recipient of a inherited IRA, for most people, you are a designated beneficiary. You must liquidate the account within 10 years there. There's still some gray area on do you have to take RMB during those 10 years? It's pretty much been settled after 2019 that that you could wait if you wanted to.

But still some debate on that behind the scenes in the financial world. Anyway, if you are meeting certain criteria, you're a minor, you are disabled, you're chronically ill. You're you're a spouse is the big one, right? If it IRA passes spouse to spouse, you're not required to liquidate it within 10 years. But when it passes to the next generation, the few exceptions are that if if you're minor, if you're disabled, if you've got a chronic illness, you may not have to liquidate the account within that 10 year period. And you basically just need to know yourself your situation. And if you may fall into one of those exceptions, and most of them do make sense that if we've already got some extenuating circumstances, or we're not old enough to inherit money, then we shouldn't have it laid in our lap all at once and have to pay unnecessary taxes.

Right. So of course, you can correct an RMD mistake, but it's still best to avoid those missteps. So is there any advice for someone who's close to that RMD age, or any steps that they should be taking right now? Well, so I I've had people that I've heard from that turned 72 this year that said my tax prepare my accountant, my CPA told me I need to take my RMD this year.

And I inform them that no, the laws have actually now changed. Make sure that your tax prepare accountant or CPA is aware of the new updated rules that say you don't technically have to until the year that you turn 73. So if you are turning 73 this year, that is something you'll need to do. But if you're turning 72, you have an extra year.

But once again, Aaron, just because you can defer doesn't make it the best thing for you. So we may want to consider a more proactive tax management strategy where we are taking some distributions in the form of a Roth conversion or a withdrawal. Honestly, either may be more advantageous than deferring and delaying, because by delaying the extra year, that's more money that is likely to fall into the tax brackets as they are scheduled to go up in 2026. So less money that you're taking out now at what we know are lower tax rates and more money that's left in the account until those new tax rates take effect in the future in 2026. And then you're removing those dollars anyway, except at higher tax rates. So be proactive, ladies and gentlemen, look at the opportunities that you have on an ongoing basis.

Make sure you're making the most of the opportunity that we have right now to pay taxes while they're on sale. And having that conversation with you is very valuable, because like you were just saying, you take a look at the future, whereas I feel like a lot of CPAs and this is not knocking CPAs are always looking at the now and how you're filing now and how it affects you. Right.

So important to have that conversation earlier. Absolutely. No, I love CPAs and accountants. They provide financial service and support that I don't personally handle that is absolutely necessary in putting those documents together.

But by nature, that's a historical event. You're looking back at the income that already happened last year, and there's very limited select few opportunities that you have to control what's already happened. You can make, you know, new IRA spousal IRA contributions to control tax from last year or maybe Roth contributions might be a better move. But as far as tax planning, looking forward to this year and the years to come, there are lots of opportunities and a whole lot that we can do to better control that tax bill. And sometimes, Aaron, this is several hundreds of thousands of dollars we're talking about with realistic expectations of life expectancies and rate of returns and what tax rates look like. It is a big move and it's not what you make. It's what you keep.

Being efficient with taxes usually is as effective as shooting for higher returns, but involves significantly less risk. Boy, I think we perked up a lot of ears with that, Peter. What's the best way to reach you if somebody would like to have that conversation with you? Give us a call at Rashaan planning nine one nine three zero zero five eight eight six nine one nine three hundred fifty eight eighty six. You can go online Rashaan planning dot com. It looks like rich on planning dot com. It's my last name, Peter Rashaan. You can email me Peter at Rashaan planning dot com. And I always appreciate you giving me the opportunity to give that contact information out there for proactive planners and savers and investors. Me, too. All right, Peter, thank you.

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