RMD Age for 2023: What’s Your Required Beginning Date?

Key Points – RMD Age: What’s Your Required Beginning Date?

SECURE 2.0 Includes Changes About RMD Age
April 1 Is an Important Date Regarding RMDs
The Five-Year Rule with Roth IRAs … and the Misconception About It
The RMD Rules for Inheriting IRAs
12 Minutes to Read | 24 Minutes to Listen

RMD Age for 2023: What’s Your Required Beginning Date?

There are new rules about Required Minimum Distributions and the RMD age after the SECURE Act 2.0 went into effect on January 1, 2023. RMDs can be very tricky, but it’s critical to understand how to plan for them. What are your RMDs going to look like in retirement? Will they influence your taxes or your probability of success? Dean Barber and Logan DeGraeve discuss how to go about doing that and more on America’s Wealth Management Show.

Confusion Surrounding RMD Age Continues

SECURE 2.0 brought us some good news when it was passed at the end of last year, but the confusion that we’ve had around the RMD age remains. Do you know your Required Beginning Date for RMDs? Congress keeps change the RMD age, so we’re going to we want to make sure that you know what rules to follow.

What Are RMDs?

Before we go into detail about the rules surrounding RMD age, we want to explain what RMDs are. That acronym stands for Required Minimum Distribution, but Dean thinks RMD stands for something else.

“It stands for, the government saying, ‘I can’t wait to get my hands on your money. You need to start taking money out of your IRA. I want my share. I need my piece of that money.’ The RMD is the amount that’s required to come out of your IRA when you reach a certain age. That’s changed a couple of times in the past few years.” – Dean Barber

The only way the government will get its share is when you take money out of your 401(k) or IRA. At that point, it becomes taxable as if it were ordinary income to you. That can have cascading effects across your tax return, so you need to think about your RMD age. And don’t just think about your RMD age as you approach it. You need to think about your RMD age as you’re leading up to retirement—perhaps as early as your mid 50s.

How You Save and Why It Matters When You Hit RMD Age

And even before your mid 50s, you need to start thinking about where you’re saving to because that will impact your RMDs. If you save to a Roth 401(k), you’re not going to have an RMD. This reminds Logan of a new client who hadn’t planned for RMDs. Their Social Security went from not being taxable to being 85% taxable. Therefore, they had about a $5,000 tax bill that they weren’t expecting.

Every financial decision that you make will end up on your tax return in some way, shape, or form. If you don’t understand the complexity of taxes in retirement and that all sources of income aren’t taxed in the same manner, you can be in for a rude awakening. Some sources of income don’t play nicely together from a tax perspective.

“That’s why I always tell people that the two largest wealth-eroding factors for retirees are health care costs and taxes. One of those is in your control, and those are your taxes.” – Dean Barber

Controlling Your Taxes

Getting control of your taxes starts well before you retire. By doing that, you’ll be in a good position for when you need to start projecting what your RMDs will be. If you retire in your early to mid 60s, you need to be ready for those RMDs that are coming up. So, what can you then do in your early to mid 60s to prepare for that?

This is where Roth conversions can come into play when you’re in a lower tax bracket. Qualified Charitable Distributions are also an option for those who are 70½ or older and are charitably inclined.

“I have some clients that don’t want to do Roth conversions. But then I tell them, for example, that they’re going to take $50,000 out of their IRA this year. They’ll ask why they would do that because they don’t need the money. Well, it’s because they can get it out at the 12% tax bracket. We know that if Congress does nothing, tax rates will go up in 2026. It’s a no-brainer.” – Logan DeGraeve

Quantifying Your Situation

When Logan talks with some who is skeptical about doing a Roth conversion because it could result in more tax paid up front than they’re comfortable with. Well, even if you need to pay $15,000-$20,000 in taxes to do a Roth conversion this year, there’s a good chance it beats the alternative of not doing it.

It goes back to what Logan just said. That tax bill with that RMD will be much higher without doing the Roth conversion, especially with tax rates going up in 2026 after the Tax Cuts and Jobs Act sunsets.

“If you move money from a traditional to a Roth, you’re going to pay tax now. What’s the tradeoff if you pay that tax now? A lot of times, we’re talking about doing Roth conversions over a longer period rather than all at once. You’re going to pay some taxes over the next seven, eight, 10 years—whatever the timeframe is—but what is the impact over the next 15-20 years? In a lot of cases, we see that it’s $250,000, $300,000, $400,000 less in taxes by doing that planning.” – Dean Barber

It’s been engrained in people to pay as little tax as possible in one year. Hopefully these tax planning strategies have demonstrated that you need to be looking at paying as little tax as possible over your lifetime instead. You can learn more about Roth conversions, QCDs, and other tax planning strategies in our Tax Reductions Strategies guide. Download your copy below!

Download: Tax Reduction Strategies

A Misconception About the Five-Year Rule with Roth IRAs

If that client didn’t need that money, taking the money out and putting it into a Roth IRA would make perfect. Some people think that if they put money into a Roth IRA by doing a conversion that they can’t touch it for five years. That’s not true.

You can always get the principal out. The five-year rule applies to the growth. When you put money into the Roth IRA, that five-year clock starts. Let’s say that you’re taking out $50,000 like Logan used in his example. You can do a $50,000 Roth conversion without there being a penalty.

“Let’s say that I’m working with a couple and one spouse is older and we’re going to do a $50,000 conversion. Let’s do $49,000 for the older spouse and $1,000 for the younger spouse to start the clock on the five-year rule with the Roth. Why wouldn’t you do that?” – Logan DeGraeve

What’s Your Required Beginning Date When You Hit Your RMD Age?

Now that we’ve outlined a scenario of how to control your taxes, let’s get back to figuring out your RMD age and what rules you need to follow for RMDs. Up until the SECURE Act passed, your RMD age was the year you turned 70½. Congress made this as confusing as possible. So, if you were born between January 1 and June 30, you had to start taking RMDs at 70. Anyone who was born between July 1 and December 31 didn’t need to start taking RMDs until they were 71.

How the RMD Age Changed with the SECURE Act and SECURE 2.0

The SECURE Act changed the RMD age to 72. And then SECURE 2.0 changed the RMD age to 73. If Congress doesn’t make any changes between now and 2033, the RMD age will be pushed back again to 75 in 2033. So, those of you who turn 72 in 2023 get an extra year before needing to take your first RMD.

“Let’s go to 2022 because we’re running up on a deadline. If you turned 72 in 2022, you have until April 1, 2023, to do this RMD. So, you have about a week.” – Logan DeGraeve

Did what Logan said confuse you (or make you panic if you turned 72 last year)? Let’s clarify that April 1 date. If you turned 72 in 2022, you need to take your first RMD by April 1, 2023. But that might not be all. If you waited until 2023 to take your first RMD, you must take another RMD by the end of the year.

Look at that from a tax planning perspective. A lot of times, it doesn’t make sense to take two RMDs in one year. But sometimes it does. At the end of the day, you need to make sure your taking your RMDs on time to avoid any penalties.

If you’ve downloaded our 2023 Retirement Planning Calendar, you already know that April 1 is one of the dates that highlighted because of RMDs. The goal of our 2023 Retirement Planning Calendar is to make sure that you’re aware of things like your RMD age and other important dates, events, and age-related milestones that can impact your retirement. Make sure to download your copy below if you don’t already have a copy.

2023 Retirement Planning Calendar

Taking Advantage of an Opportunity

With the RMD age changing from 72 to 73 thanks to SECURE 2.0, we don’t want people to simply be excited that they get to delay taking RMDs by a year. Yes, it’s exciting, but only if you take advantage of the opportunity at hand. If you don’t do any planning, all you’re doing is hurting yourself. Hypothetically, your IRA balance should increase (we don’t know what the market will do this year, for sure).

If you turn 73 this year, you must take your first RMD by April 1, 2024. That’s because April 1 of the year after you turn 73 is now your Required Beginning Date.

Beneficiary Rules for Required Minimum Distributions

Hopefully, these rules surrounding RMDs and the RMD age are making some sense to you. Because we’re not quite done yet. There is another set of RMD rules for beneficiaries of 401(k)s or IRAs. These rules can be even more confusing.

Inheriting a Tricky Tax Situation

If you inherited an IRA and the individual that you inherited the IRA from turns 73 this year, you can inherit that IRA as a child or grandchild and use the 10-year rule and not make RMDs on it. However, you must empty the account within that 10-year period.

“The rule says that if you’re inheriting, the person has to have died after their Required Beginning Date in order for you as the beneficiary to need to start doing RMDs when you inherit the IRA. If they die after their Required Beginning Date, you as the beneficiary must take RMDs every year for that 10-year period and the account must be fully depleted by the end of the 10th year.” – Dean Barber

A Big Problem That Could Arise During Your Peak Earning Years

Now, think about this. When do most people inherit money? It’s during their peak earning years. Let’s go over another quick example to explain why that’s important.

“Let’s say that you and your spouse are in your 50s and making a combined $300,000. Your mom and dad pass away and you inherit a $2 million IRA. Now, your household income is going to be around $500,000 a year. That’s a huge problem. Instead of your mom and dad paying taxes on that and doing Roth conversions when rates were low at 12%, you could be paying it at 32%.” – Logan DeGraeve

There are a lot of instances where the beneficiaries of IRAs are going to be forced to take money out of their IRAs during their peak earning years. They’re going to pay more taxes on that money than their parents ever saved and at a higher rate than their parents ever earned at when they were putting money into the IRAs. That’s why you need to be thinking about RMDs as you’re building your retirement plan.

Managing Your Tax Brackets

Let’s say that you’re 55 and planning to retire at 60. You’re already projecting what those IRA dollars are going to be worth at 75 (it’s 75 and not 73 because the RMD age is moving to 75 in 2033). You’re going to look at that assumed value of the IRA in the future to determine what the RMD is going to be. What did that do to the taxability of your Social Security, other qualified dividends, and capital gains? You need to start doing some planning to make sure that number is as low as possible. You do that by managing your tax brackets.

Dean, Bud Kasper, and our Director of Tax Corey Hulstein discussed bracket management a couple of weeks ago on America’s Wealth Management Show. If you missed it, go check that episode (What Is Tax Planning?) out on our YouTube channel.

“Bracket management simply means that when you’re in retirement, you need to understand the tax brackets you’re in versus what tax brackets you’re in in the future. It’s about getting as much money out as possible while you’re in those lower brackets, knowing that you’ll be in a higher tax bracket in the future.” – Dean Barber

What If You Suddenly Become a Single Tax Filer and You’re RMD Age?

And you actually need to go one step further than that. You need to set the stage for how you’re going to pay those taxes. That’s done by having cash in the bank or a taxable brokerage account that you can access. You can pay money out of the IRA, but all you’re doing is increasing your income. It’s not quite as effective.

“Here’s my challenge to people with planning for RMDs. If you’re 60 and looking at your RMDs starting at 73, I want you to look at them as if you’re a single tax filer. While we hope everyone has a long and healthy life, the reality is that your financial plan isn’t a perfect stained-glass photo. One spouse may pass away at 75, while one may live to 85. That’s 10 years as a single tax filer. Do you know what? The RMD doesn’t get any smaller.” – Logan DeGraeve

IRMAA Brackets

Not only does the RMD not get any smaller for single filers, but they hit the higher brackets at a much lower income level. And then, there’s the IRMAA brackets.

“Medicare is known as means tested. It’s a two-year look-back at what your income was. Let’s say someone is under $200,000—whatever IRMAA is—they’re fine. When you start getting above that second tier, your Medicare Part B premiums increase. You don’t necessarily need to write them a check, but it’s taken out of your Social Security. So, that’s less dollars in your pocket. If you look at IRMAA brackets for a single person, the brackets are very small. It doesn’t take long to fly through them.” – Logan DeGraeve

Logan saw an example a few weeks ago with someone he met with recently whose wife passed away last year, and he was very worried about taxes. He realized he had a big problem, and Logan unfortunately confirmed that his fears were warranted. He’s going to be a single tax filer this year and it coincides with RMD age.

“He’s projected to be in the 24%, maybe the 32% tax bracket. Well, he and his wife had been in the 12% bracket for the last five years. But they didn’t do anything.” – Logan DeGraeve

A Few Stark Differences Between a CFP® Professional and a Financial Salesperson

As a CFP® Professional, Logan understands the importance of doing that forward-looking planning so that the person he met with doesn’t end up in that difficult situation. On the other hand, that won’t necessarily be the case with someone who just does investment management or is selling financial products. A CFP® Professional who works alongside a CPA does those longer-term projections brings them to the forefront of the conversation.

“These are things that we know are going to happen in the future. It’s how we deal with these things prior to that date that allows us to control the amount of taxes that someone pays.” – Dean Barber

Dean remembers about a decade ago when he was working with an individual and encouraged him to retire. He had a giant 401(k) and his RMDs, which he was going to need to start taking then at 70½, were going to be very big. He had plenty of money at 65 and could retire, but wanted to keep working because he enjoyed it. The tax planning strategies that Dean mentioned to him didn’t interest him, and that led to a troublesome situation.

“He finally retired the same year that his RMDs started. His RMD was so large that the tax bill was double his Social Security payment. During that first year, he sat down with me and said he should’ve listened. He said it was ridiculous how much he was paying in taxes. He had painted himself into a corner that he couldn’t get out of.” – Dean Barber

Learning from America’s IRA Expert

Make no mistake about it, the many rules about RMDs and RMD age are confusing. That makes Dean and Logan both even more thankful to be members of Ed Slott’s Elite IRA Advisor Group^SM. The same goes for Bud, Will Doty, and Drew Jones. They soak up all the knowledge they can when studying with Ed Slott, who is America’s IRA expert, and then share it with as many people as possible.

Ed recently joined Dean on The Guided Retirement Show, so make sure to check out that episode, Understanding the SECURE Act 2.0 with Ed Slott. Dean and Ed took a long look at how confusing Congress has made people’s retirement plans.

Living Your One Best Financial Life

Retirement shouldn’t be a time of stress and confusion, though. It should be a time where you celebrate being financially independent and living out your goals and dreams. We’re here to help you with that. If you have questions about RMDs, your RMD age, or anything related to retirement planning, let us know. You can schedule a 20-minute “ask anything” session of complimentary consultation with one of our CFP® Professionals by clicking here. You can meet with us in person, by phone, or virtually.

And if you’re not quite ready to meet with one of our CFP® Professionals, that’s OK. We still have another way we can help you. We encourage you to test out our industry-leading financial planning tool. It’s the same tool that our CFP® Professionals use with our clients when building and reviewing their plans. You can use it at no cost or obligation by clicking the “Start Planning” button below to build a plan that’s unique to you. And then, if you do have any questions for us, we’re still happy to meet with you.

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We hope that we’ve been able to provide some clarity on your RMD age and the confusing RMD rules. Again, please don’t hesitate to reach out with any questions.

RMD Age for 2023: What’s Your Required Beginning Date? | Watch Guide

Introduction: 00:00
Planning for the RMD Age: 01:27
RMD 5-Year Rule: 03:59
What are RMD Required Beginning Dates?: 05:24
RMDs for Beneficiaries: 08:52
Planning for RMDs at Age 55: 12:40
RMDs as a Single Tax Filer: 14:42
Planning with a CPA and CFP® for RMDs: 16:47
Tax Planning is Long-Term Planning: 19:59
Conclusion: 22:02

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The views expressed represent the opinion of Modern Wealth Management, LLC, an SEC Registered Investment Adviser. Information provided is for illustrative purposes only and does not constitute investment, tax, or legal advice. Modern Wealth Management, LLC does not accept any liability for the use of the information discussed. Consult with a qualified financial, legal, or tax professional prior to taking any action.