Required Minimum Distributions
Recent changes to required minimum distributions (RMDs) will have a significant impact on how financial advisors construct retirement income plans. Learn more about two of the the biggest changes in our FinPlan Friday conversation with Joe.
In our video blog series, FinPlan Fridays, Covisum® Founder and President, Joe Elsasser, CFP®, offers his take on the issues financial advisors see every day. Joe is a practicing financial planner with a unique perspective into the challenges for which Covisum provides technology solutions. Join us on the first Friday of every month for FinPlan Fridays, and get helpful tips to grow your financial planning practice.
Hi, this is Joe Elsasser, CFP®, President and Founder of Covisum and also a practicing financial advisor. Welcome to another FinPlan Friday. Today, we're going to talk about two changes to required minimum distributions that will impact when and how much you take. And they'll also have an impact on how you construct retirement income plans.
Changing the Beginning Date From 70 1/2 to 72
The beginning date for required minimum distributions is changing from 70 1/2 to 72. If you were in a vacuum, you might think, "That's great. It just extended or shortened the distribution period--the time over which you have to take distributions and added a couple of extra years of deferral for most people."
Now, while that's true, it also may have compounded a problem. Clients who've saved almost entirely in IRA accounts oftentimes have saved more than they need, and when those required minimum distributions kick in, they actually force more money than the client wants out of the IRAs. This creates taxation at higher brackets than would have occurred if the client had spread out distributions over more years.
Ultimately, the client who's not really thinking about it may actually create more of a problem by delaying their distributions longer. As an advisor, this is one thing you should be thinking about for your clients.
New RMD Tables
The IRS released new RMD tables that become effective in 2022. Basically, they back off the minimum distribution amount by roughly two years based on changes to life expectancy. So on the old tables at age 70, the lifetime table would have had 27.4 years as the distribution period, now at age 72 it has 27.4 years. As you go further out, the ages get closer and closer together, but needless to say, it is a reduction in the amount that you would have to take at any given age.
These two changes offset each other a little, but they also draw attention to a central problem: clients who have over-saved in IRAs will eventually have minimum distributions that get taxed at a higher rate than necessary. To solve this, most advisors should consider thinking about leveling out tax brackets earlier, either by taking IRA money to supplement the delay of a Social Security benefit or potentially by doing Roth conversions. Either of those are good solutions to bring down an eventual RMD problem.
Thanks for joining us. Look forward to seeing you next time.