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RMD age increase and wrong notices create tax confusion for some retirement account owners

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Photo by Nicola Barts

If you turned 72 last year and didn't take your first required minimum distribution (RMD) by Dec. 31, 2022, you have a few days to take the mandatory withdrawal.

April 1 is your deadline to take out the specified amount from your tax-deferred retirement savings account(s).

This year, however, is the last one for the age 72 RMD trigger.

The latest retirement law changes in the Setting Every Community Up for Retirement Enhancement (SECURE) Act 2.0 changed the RMD starting age to 73.

However, there's been a bit of confusion about the change. Some people have received notices that they must take an RMD this year when actually, thanks to the new retirement law, they can leave their nest eggs untouched until 2024.

Late tax law creates confusion: The problem is Capitol Hill's penchant for putting things off until the last minute. The SECURE Act 2.0 was passed by Congress late last December, and signed into law on Dec. 29, 2022.

That end-of-year enactment posed problems for financial institutions who hold clients' tax-deferred accounts.

They are required to notify account owners of impending RMDs in the coming year by Jan. 31. But because the retirement law was enacted so late in the year, financial institutions didn't have time to revise their notification processes to account for the new age 73 trigger.

So many financial institutions sent out alerts, based on prior law that was in effect for 362 days of 2022, telling IRA owners who will turn 72 in 2023 that they have an RMD due for 2023, even though that's no longer true.

The RMD effective age, starting Jan. 1, 2023, now is 73.

The Internal Revenue Service realized the chaos confronting banks and their retirement account owners. The tax agency informed the financial institutions via Notice 2023-23 that they won't be penalized for sending out the outdated information as long as they correctly notify the account owners of the law changes.

Septuagenarians who are just 72 this year don't have to worry about the notice. You get until 2024 to start making RMDs.

If you got a wrong RMD notice, you can ignore it. If you haven't already received a corrected mailing with the accurate age/RMD rules from your IRA's account custodian, you should get one by April 28.

Early retirement saving is first step: The confusion does, however, does serve as a good reminder that we should start thinking about our retirement accounts before the day we permanently leave our jobs or start tapping those savings.

The first issue, obviously, is to save as much as you can as soon as you can. You have a variety of options.

Younger people should explore Roth accounts, both individual retirement accounts and, if available, workplace 401(k) plans. Contributions to these are made with already-taxed dollars and generally are not affected by RMDs.

Some folks still like traditional IRAs, which in some cases could provide an immediate tax break as an above-the-line deduction. Pre-tax contributions also go into traditional workplace 401(k) plans. These accounts do face RMDs.

RMD early planning also imperative: Once you open and regularly contribute to a tax-deferred retirement plan, keep an eye on it. Not only will this help you make any investment adjustments you deem necessary, it will give you an idea of what your eventual RMD will be.

The amount you must take out is based on the value of your account the year before you reach RMD age. That's currently 73, but for younger readers who are long-range planners, that will increase to age 75 in 2033.

You divide that account value by the years listed in the applicable IRS lifetime tables. There are three, but most people use the Uniform Lifetime Table. For 72-year-olds, that figure is 27.4. So if you have $1 million in a traditional IRA, you'd have to withdraw $36,496 to meet your RMD.

My earlier post "IRS updates life expectancy tables that determine RMDs" has the full Uniform Lifetime Table. You also can use AARP's online RMD calculator.

Withdrawals from tax-deferred retirement accounts are taxed at ordinary tax rates, which now top out at 37 percent. And that 36+ grand in the above example is a hefty chunk of change that likely will bump the account owner into a higher tax bracket.

Consider pre-RMD withdrawals: Since you can start taking money out of traditional retirement accounts without any tax penalty once you turn 59½, it might be worth withdrawing some funds before you hit RMD age.

Such withdrawals are not to be done rashly, or with only future taxes in mind.

You need to look at your present financial situation. How much can you take now without adversely affecting your current taxes?

You also have to deal with the imprecise art of predicting how your investments will do in the coming years. The hope and goal, obviously, is that they will grow, but as markets have proved, that's not always the case.

But even if they increase only nominally, it will mean larger RMDs once you must start taking money from the retirement accounts.

And it's always worth looking at what RMDs you might face in a few (or more) years. That will give you the option to consider any actions now (or soon) that could ease the potential tax bite in your golden years.

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