IRAs/RMDs/OMG!

One of the largest financial assets most Americans have are frequently tied to IRA's, employer retirement plans, and Roth IRA's. As we know (hopefully), required minimum distributions (RMDs) apply to any pre-tax IRA's and if you are no longer working, your balances at your prior employer plans as well. To complicate things further, if you have multiple prior employer plans, you will have to take an RMD from each plan when you reach age 73. It's possible you had to start taking them at age 70 1/2 if you hit that prior to the change in the rule in 2019 or you may not have to take them until age 75 if you were born in 1960 or later.

Are you still with me? We haven't even gotten to the hard part yet. If you own more than 5% of your business, you will have to take your RMD regardless if you are still working or not. If you are not a 5% owner, you can delay taking RMDs until you cease working. We have experienced people in their 80s still not having taken their first RMD because they continue to work and aren't owners.

Where all of this gets tricky is when you die. There are two ways to approach this, 1) I'm dead, it's someone else's problem or 2) I am going to do some advanced planning now to simplify the tax burden for my heirs. We don't pass judgement on either approach as to each his/her own.

With all of the improvements to retirement plans in the SECURE Act and SECURE Act 2.0, the complexities of RMD's have gotten increasingly difficult. There are now three different categories of beneficiaries. The first depends on whether the IRA owner died before taking their first RMD. If this is the case, money will have to come out by year ten. The second is if the IRA owner had already begun those RMDs in which case you have to take all of the money out within ten years as a non-spouse beneficiary and also continue taking out an RMD each year from 1-9. The third category comes up much less and depends on whether the beneficiary qualifies as an eligible designated beneficiary. These are surviving spouses, minor children of the account owner until age 21 (but not grandchildren), disabled individuals, chronically ill individuals, and individuals older than or not more than ten years younger than the IRA owner.

As you can see from the above, there can be a lot of complexity on something as simple as removing money from IRA's. We always encourage investors to evaluate the best approach for their situation and seek guidance throughout the process.