The following article is based on our recent Lifetime Planning podcast, How to Optimize Your IRA and Reduce Taxes, with Financial Sense Wealth Management’s Jim Puplava and Crystal Colbert.
As financial markets continued their impressive run throughout 2023, retirees with IRAs and 401(k)s are facing higher required minimum distributions (RMDs) in 2024. The record-setting market performance of 2023 directly impacts how much individuals must withdraw from their retirement accounts next year through RMDs. However, with proactive planning, retirees can minimize taxes and set themselves up well for the future.
The Calculation
Your required minimum distribution amount is calculated based on the total balance of your traditional IRAs and employer-sponsored retirement plans as of December 31st of the prior year. For the 2024 RMD, this means your account balances as they stood at the close of trading on December 31, 2023. With major indices like the S&P 500 finishing the year at all-time highs, balances for most retirees ended 2023 larger than ever before.
As a result, the RMD calculation for 2024 will yield higher distribution figures compared to previous years for many people. “Your RMD is going to be higher than it was last year or the highest that it’s ever been,” explained financial advisor Crystal Colbert. She noted clients should review their estimated tax payments for 2024 to accommodate the rise. Higher taxable income can also eventually lead to increased Medicare premiums down the line.
Additional Compounding Factors
On top of ending balances pushing RMDs up, two other factors compound the effect. First, the required withdrawal percentage scales up each year as you grow older. So, aging alone necessitates a larger distribution, even without market gains. Second, the temporary tax cuts of 2017 are set to expire after 2025. This means tax rates will jump significantly in 2026 if nothing changes, taxing lower levels of income at much higher brackets.
With all this in mind, now is the time for retirees to develop strategic plans to maximize wealth in the years ahead. Taking advantage of the opportunities available over the next few years can help relieve the pressures of higher RMDs and future tax increases.
Proactive Planning Strategies
Puplava and Colbert outlined several tactics retirees should consider:
Roth Conversions - Converting pre-tax dollars in IRAs to Roth accounts allows future distributions to be tax-free. With rates still low now, maximizing conversions over 2024-2025 readies retirees for higher post-2025 tax rates.
Qualified Charitable Distributions - For the charitably inclined, donating up to $105,000 directly from an IRA to charity in 2024 satisfies RMD obligations without creating taxable income.
Dividend Stocks in Roth IRAs - Filling a Roth with shares of stable, high-yield companies like utility and telecom giants generates substantial ongoing tax-free income streams both for retirees and beneficiaries.
Brackets Management - Careful planning aims to keep taxable income within the lower 22-24% brackets rather than facing a 32% rate or increased Medicare levies from pushing into a new threshold.
Timing Capital Gains and Losses - Realizing long-term gains this year to the extent possible utilizing the current 0%, 15%, and 20% rates. Losses can offset gains dollar-for-dollar to reduce taxes owed.
Advanced planning also mulls strategies like 72(t) distributions, charitable gift annuities, and donor advised funds as supplemental tax-efficient tools. Working with experienced advisors ensures all available options are on the table.
Staying Proactive is Key
While larger required distributions may seem daunting, proactive planning empowers retirees to leverage opportunities and minimize tax exposure. Rather than facing higher taxes as an uncontrollable consequence, we can develop a custom-tailored solution for each individual’s needs and priorities.
Approaching the situation with a long-term perspective, the sharp market gains that drive up RMDs also boost underlying account balances, extending the life of those funds. By keeping proactive annually, retirees stand ready to ride the market’s waves and avoid tax traps lurking in the years ahead.
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Advisory services offered through Financial Sense® Advisors, Inc., a registered investment adviser. Securities offered through Financial Sense® Securities, Inc., Member FINRA/SIPC. DBA Financial Sense® Wealth Management.
