Higher Taxes Headed Your Way?
Are higher taxes headed your way in the future?
These potentially higher taxes may be due to higher than expected required minimum distributions (RMD’s).
The starting age for RMD’s is now 73. We even had a period where there were no required minimum distributions due to Covid. And compounding has continued to create greater larger retirement balances. All will be taxed upon distribution, leading to potentially higher taxes for you.
Add in the fact the average life expectancy is SHORTER at age 73, and you are now faced with taking a larger taxable distribution in retirement.
The end result? Higher taxes.
This wasn’t how this was supposed to work in retirement! We were supposed to be in a lower bracket after retiring, not paying higher taxes!
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Transcript for Higher Taxes Headed Your Way
Higher taxes may be heading your way and we’re going to talk about that.
Higher taxes may be coming your way in the future.
Fidelity announced recently that in 2024 they are going to see a record amount of RMD’s (required minimum distributions). They they expect it to exceed $25 billion dollars this year.
Remember your required minimum distribution, your RMD, is based on the value of the account on December 31 of last year.
A lot of folks said “Hey we noticed in 2023 that our RMD didn’t really change that much. That is because the market was down in 2022. So remember it’s based on the value of the year before.
But there’s another reason why – or a few reasons why – RMD’s are going to be higher, both now and going forward.
It used to be that required minimum distributions started at age 70.5. Now they kicked it to age 72, and now it’s age 73.
You’ll even remember a couple of years ago they suspended required minimum distributions during COVID.
So we’ve had years where there was no money coming out of these accounts.
They continued to compound. And the market has continued to “do what it does.”
And now we also have people waiting until age 73 to start taking distributions. We’ve got a few extra years of compounding in there.
But another thing that people tend to overlook is your required minimum distribution is based on your life expectancy.
The life expectancy for someone at age 73 is shorter than someone at 69, or 70, or even 71.
And so you’ve got a bigger pile of money and a shorter life expectancy.
You’re going to have a larger required minimum distribution.
And as we say, it’s a “minimum” distribution. That’s the minimum that you have to take out. But when the money does come out of your retirement account, it’s always, always, always going to be ordinary income. It won’t be capital gain.
We deal with a lot of folks who are in the 35% marginal tax bracket.
What that means is if they’re in the 35% marginal tax bracket and they start drawing money from their IRA, or their retirement account, every dollar that comes out is taxed at 35%.
That’s not a situation most folks want to be in.
By comparison, capital gains rates, long term gains, have three different buckets, three different rates
There’s 0%, 15% and 20%.
I’m no math whiz, but those three numbers are less than 35% marginal income tax rate.
We don’t know what income tax rates are going to look like in the future. But it won’t be “free.”
What is something you can do, or things that you should consider?
The first is, maybe maxing out your 401(k) may not be the best situation.
Maybe what you what to do — it’s easy to say, it’s very hard to do — is be a little diligent and sock money away post-tax. Put it into something that’s gonna grow, and develop some kind of long term capital gains.
Again, 0%, 15% and 20% long term capital gains rates are less — or might be less than — the marginal tax bracket you’re in, when it’s time to take money from your retirement accounts.
You should also think about — and work with an advisor — about whether it’s beneficial to start taking money out, before age 73? Start taking this money out? By doing that, what you’re doing is “lowering the base” that’s going to be counted when they calculate your RMD at age 73.
There’s nothing that says you “have to wait” until age 73. You may also want to consider doing a Roth conversion. Now, you are going to pay taxes with that.
The most optimal situation we’ve seen is a year where you have little-to-no income. Say you retire from your job and you retire in February. You only have two months of income that year, not twelve months of income. That may be a beneficial time to think about doing a Roth conversion.
There’s also qualified charitable distributions (QCD) that you can now do with your required minimum distributions.
You can send money to a charity. This year you can donate up to $105,000. Every year this gets indexed for inflation. But while you don’t get the tax break for making a gift to a charity, you don’t also have to show that money as taxable income. So there are options out there.
But it’s imperative that you consider talking to your adviser about what the strategy should be, when it comes to taking your required minimum distributions.
That’s the story for episode 367, thanks again for tuning in.