The Tax Traps in Delaying IRA Distributions

You are receiving this email because you signed up to receive Bob Carlson's free e-letter Retirement Watch Weekly, or you purchased a product or service from its publisher, Eagle Financial Publications. [Carlson's Retirement Watch Weekly] [Retirement Reports](www.retirementwatch.com/retirement-resources/) [Retirement Articles](www.retirementwatch.com/retirement-articles/) Brought to you by Eagle Financial Publications The Tax Traps in Delaying IRA Distributions by Bob Carlson Editor, [Retirement Watch]( 03/03/2024 SPONSORED [The Dividend Stock to Leave for Your Grandchildren]( [image]( This stock is one of those rare finds that you can hold forever and pass down to your grandchildren. It should be a core position in every investor's portfolio—especially with its hefty yield! New FREE report gives you the name of the safest, most reliable, and most consistent dividend stock that pays dividends EVERY month. In addition to paying 12 dividend checks each year, this company has also increased its monthly dividend twice every year for the past 8 years. [Click here to get its name now--FREE.]( [CLICK HERE...]( Fellow Investor, [Bob Carlson]Congress expanded a tax trap for many owners of traditional IRA and 401(k) accounts when the SECURE Act 2.0 was enacted in December 2022. The law delayed the starting age for required minimum distributions (RMDs) to age 73, effective January 1, 2023. The starting age will jump to 75 effective January 1, 2033. If you turned 72 in 2023, your first RMD will be for 2024 (the year you turn 73) and can be taken as late as April 1, 2025. For those who turn 73 in 2023 through 2032, the starting age for RMDs is 73, and the first RMD must be taken no later than April 1 of the year following the year they turn 73. The beginning age for RMDs is 75 for those who turn 74 after December 31, 2032 Another way to look at it is that the beginning age for RMDs is 73 for those born from 1951 through 1959 and is 75 for those born in 1960 or later. You can delay RMDs, but the question is: Should you delay RMDs just because the law says you can? For a lot of people, the answer is “no.” The first rule of tax planning is to delay paying taxes for as long as possible. But that’s not always the way to decrease lifetime and family income taxes. Years ago, before we had Roth IRAs and other tools, I crunched the numbers and found that for some taxpayers, the better strategy is to begin emptying a traditional IRA before they had to and reinvest the after-tax distributions in taxable investment accounts. The strategy is optimum for more taxpayers today. Of course, not everyone has flexibility about IRA distributions. Some people need to begin distributions before RMD age to pay their retirement living expenses, and others need distributions that exceed the RMD amount. But many IRA owners have options. They need to take a close look at the alternatives and develop a strategy for taking IRA distributions and spending other assets. There are several potential dangers to leaving assets in a traditional IRA or 401(k) for as long as allowed. Distributions from a traditional retirement account are taxed as ordinary income subject to your top income tax rate. The IRA might be earning long term capital gains, qualified dividends and other tax-advantaged income. But it’s all taxed as ordinary income when distributed. It might be better to take the money out of the account early, pay the taxes and invest the after-tax amount to earn tax-advantaged gains and income. Another danger is your income tax rate might increase. People generally believe their income tax rate declines once they retire. That was the case when we had a lot of tax brackets. But since the Tax Reform Act of 1986, we’ve had relatively few tax brackets. Many people stay in the same bracket after retiring. In addition, tax rates for each of the brackets might increase. The Tax Cut and Jobs Act of 2017 is set to expire after 2025. If Congress doesn’t act, tax rates will jump back to their pre-2018 levels. Or at some point, Congress might raise taxes to close the budget deficits and pay for the outstanding debt. The big risks for retirees are the Stealth Taxes, which either directly target retirees or affect retirees more than other taxpayers. The Stealth Taxes include the inclusion of Social Security benefits in gross income, the Medicare premium surtax (also known as IRMAA), the 3.8% surtax on net investment income and others. The mechanics of how RMDs are computed increase these risks. The percentage of the IRA to be distributed and taxed to you each year increases annually under the life expectancy tables developed by the IRS. The amount distributed and taxed to you can increase even when the value of the IRA declines. Also, delaying distributions is likely to cause the value of the IRA to increase and further increase future RMDs. By bunching the RMDs of a higher-value IRA into fewer years, you could be pushed into a higher tax bracket or have more of the RMD taxed at your highest tax rate than would have happened if the distributions had begun earlier and been spread over more years. [URGENT WARNING: Millions of Retirements Are At Risk]( [image]( Congress is spurring on the most dangerous retirement threat of the last 50 years. America’s top retirement researcher reveals the deadly truth behind this government move… Plus the ONLY way to fully protect wealth in the coming months. [Click Here for the Full Story.]( [CLICK HERE...]( Waiting to take distributions also can create tax problems for your children or other heirs. Beneficiaries who inherit traditional IRAs and 401(k)s must pay income taxes on the distributions just as the original owner would have. Beneficiaries really inherit only the after-tax value of retirement accounts, and that value depends on the beneficiary’s tax bracket. Remember that the original SECURE Act eliminated the Stretch IRA. Beneficiaries no longer can spread distributions from an inherited retirement account over their life expectancies. Instead, most beneficiaries must distribute the entire IRA within 10 years. The SECURE Act’s distribution rules generally increase the taxes paid on the inherited IRA because the distributions are bunched into fewer years. The SECURE Act also eliminates the long term benefits of an IRA’s tax-deferred compounding. When the IRA owner delays and minimizes distributions, it is likely that higher taxes will be transferred to beneficiaries. Don’t let Congress and the IRS determine your IRA distribution strategy. Consider the income taxes both you and your heirs will pay on retirement account distributions. Compare the lifetime taxes that would be paid by you and your family under different scenarios and decide on the optimum strategy. The first mistake many people, even financial professionals, make is to develop a plan by using rules of thumb, general guidelines, or an intuitive analysis. Some look at the results over only a year or a few years. What you need to do is run all the numbers and examine the results over a long time. The best analysis covers not only the rest of your life, but also after your beneficiaries inherit. Run the numbers using different scenarios and strategies and compare the results. There are software programs available to help, and of course you can work with a financial planner. Here’s an example prepared by economist Lawrence Kotlikoff using his firm’s MaxiFiPlanner software. A married couple has substantial 401(k) balances (about $3 million each), another $250,000 in taxable investment accounts, an expensive home and annual compensation of about $250,000 each. They’re currently 62. They plan to retire and claim Social Security benefits at 64. They also plan to roll over their 401(k)s to IRAs and delay withdrawals until they have to take RMDs at age 75. But under that plan, they’ll have significantly less money to spend each year than they do now. Most of their income will pay for regular living expenses, and they’ll have a relatively small amount to spend on discretionary items. The analysis (which accounts for income taxes) shows a better strategy would be for each to defer claiming Social Security benefits until age 70 and begin taking distributions from their IRAs when they retire at age 64. This new strategy increases their lifetime Social Security benefits and total lifetime income by about $400,000. It also reduces lifetime state income taxes and Medicare premium surtaxes. This analysis reaches the same conclusions as other studies over the years. It often makes sense to begin spending from IRAs and other traditional retirement accounts earlier than required to defer claiming Social Security benefits. It is also a good idea for many people to begin spending from traditional IRAs before being forced to take RMDs. The benefit of the SECURE Act 2.0 is that, because it delays the RMD beginning age, it presents a longer period for effective planning. Most people will retire sometime in their early to mid-sixties. If they don’t claim Social Security benefits until 70, they have an extended period during which they will have no earned income and will be in relatively low tax brackets. They essentially can pick their tax brackets by choosing how to take income from the different accounts they own. You have some control over the income taxes due on retirement plan distributions until you claim Social Security benefits and have to take RMDs. Use this period to implement long-term tax reduction and retirement cash flow planning. To a better retirement, [Bob Carlson] Bob Carlson Editor, Retirement Watch Weekly Editor’s Note: Diversifying an investment portfolio protects it from bear markets, inflation, deflation, and more. But many IRA investors don’t know that Congress and the IRS built obstacles on the road to diversification. Most tax and financial advisors also aren’t aware of the all the rules and restrictions in the tax code. That’s why I created my IRA Investment Guide. It provides the roadmap investors will need to avoid the many dangers for IRA investors. [Click here now to get a copy.]( SPONSORED [Step by Step Guide to Revolutionize Your Options Trading]( [image]( Would you like a step-by-step guide to walk you through how to maximize your Options strategies? Best of all, anybody can learn how to do it. All you need is about 1 hour to learn how you can execute this simple strategy. [Do NOT miss this opportunity to revolutionize your Options trading.]( [CLICK HERE...]( Want More Retirement Advice? Check out my website, [RetirementWatch.com](, where you’ll find hundreds of free articles covering every aspect of retirement planning. Popular Posts: [Marital Deduction - Dos and Don'ts]( [The Overlooked Triple Tax Saving Tactic]( [10 Basic Rules for Every Estate Plan]( [How to Vary Spending During Retirement]( New to the Retirement Watch Community: SeniorResource.com It’s a mistake that’s all too common, and it comes with a lifelong penalty. 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