Mastering Your RMD Strategy: Navigating Retirement Withdrawals in the SECURE 2.0 Era

Navigating the ins and outs of retirement planning requires a strategic approach, both when contributing to your retirement account and when it’s time to start making withdrawals. The landscape shifted with the enactment of the Setting Every Community Up for Retirement Enhancement (SECURE) 2.0 Act in December 2022. The SECURE Act changed the guidelines and distribution rules for 401(k)s, individual retirement accounts (IRAs), and other retirement plans. While these adjustments impact a broad spectrum of account holders, individuals who have already crossed the threshold into retirement may find themselves at the forefront of these changes and prompted to take a proactive stance in optimizing withdrawals.

Unraveling the RMD Mystery

One of the crucial aspects impacted by the SECURE 2.0 Act are Required Minimum Distributions (RMDs). An RMD is the minimum amount of money the IRS mandates you withdraw each year from most tax-deferred retirement accounts, including profit-sharing, 403(b), 457(b), and 401(k) plans, as well as various types of IRAs (excluding Roth IRAs). The penalty for an RMD that has been missed or not fully taken has now been reduced from 50% to 25% which is further reduced to 10% for timely corrections.

For many years, the first of these RMDs was required by April 1 of the year after you turn 70 ½, known as the required beginning date. The original SECURE 2.0 Act, passed in 2019, increased the age to 72 and the SECURE 2.0 Act, passed in 2023, further increased the age to 73. It also established an additional increase that will bring the starting age to 75 by 2033. However, individuals aged 72 or older before the enactment of the SECURE 2.0 Act remain unaffected and must adhere to the previous RMD schedule.

Crafting Your RMD Strategy

Your initial RMD can be taken in the year you turn 73 or by April 1 of the year following the year your 73^rd birthday, which provides some flexibility. Delaying this first distribution can be strategic, especially if there are significant income changes between the first and second years. Delaying to the year after you turn 73 will require two RMDs in that year, the one for the year you turned 73 and the second for the year you turn 74 since you can’t delay any other RMDs.

Deciding when to take an RMD during the year is a personal choice, with options ranging from early withdrawals to cover immediate expenses, spreading the distribution over the year, or waiting until year end. Considering the potential for legislative changes, waiting until later in the year may also have its advantages.

The importance of proactivity in financial planning cannot be overstated, especially when it comes to RMDs. Avoiding steep penalties for failing to take a required distribution is paramount. For personalized advice on navigating the new rules surrounding RMDs, explore our insights or engage with your financial advisor to discuss tailored options. If you do not have an advisor, contact Mercer Advisors to learn more on how we can help. As retirement landscapes evolve, staying informed and proactive remains key.

Burning RMD Questions

1. What is an RMD? Required Minimum Distributions are mandatory annual withdrawals from specific retirement accounts, excluding Roth IRAs. Failure to comply with IRS rules results in a penalty, now reduced to 25% by the SECURE 2.0 Act.
2. When should I take an RMD? Traditional IRAs and 401(k)s generally require you to start taking RMDs by April 1 after you turn 73. The timing of RMDs within the calendar year offers flexibility. Whether taken at the year’s outset to cover living costs or later to assess overall tax liability, individuals can tailor their approach to suit their financial needs.
3. How to use an RMD? Options abound for utilizing RMDs, from depositing them into a checking or savings account for immediate cash flow to reinvesting in the market via a taxable investment account. Those over 70½ can also explore making a qualified charitable distribution (QCD) to benefit a qualified charity.