A set of proposals that have major impact on retirement savers are sneaking past headlines. According to CNN, "the proposals have broad, bipartisan support and a clear path forward. If Senators are able to reconcile their ideas into a concise package, President Joe Biden could sign the changes into law before Congress' August recess."
Here are the details:
Giveth: In 2022 the life expectancy tables used for calculating Required Minimum Distributions (RMDs) were changed, providing a longer life expectancy which results in smaller RMDs. Additionally, RMDs are no longer required starting at age 70.5, but by age 72 instead.
Taketh Away: For deaths that occur in 2020 or after, the “stretch” Beneficiary IRA (which previously allowed you to delay annual RMDs until year 10) was taken away except for spouses and a few other qualified beneficiaries. The current proposal has annual RMD requirements.
Per the WSJ, the House of Representatives voted recently to delay the RMD age to 75. The bill has bipartisan support in the Senate, which means it could soon be law.
Not everyone can afford to delay taking distributions out of their retirement accounts. They need the income to live, so delaying distributions when an RMD is not required is not an option. But for those who don’t need the income, it may not pay to delay.
Compressing your retirement distributions into fewer years could result in more taxable income in a single year. More taxable income may throw you into a higher tax bracket and cause you to exceed the Income Related Monthly Adjustment Amount (IRMAA) threshold causing you to pay more for your Medicare Parts B and D premiums.
If you don’t need the income now and want to reduce your RMD when it is eventually required - I agree with professor Wade Pfau's comments in this note - you might consider doing Roth conversions to reduce your retirement account and thereby your RMD when it is required. You may want to start those Roth Conversions in the years before you turn 63. The cost for Medicare is determined by looking at your income two years prior to the year of the premium. In other words, the 2022 premium is based on your Adjusted Gross Income (AGI) in 2020. And if this is truly money you don’t need, as Ed Slott points out, you have the added benefit of making a gift to your beneficiaries by paying the tax now, hopefully many years before they will inherit. And then there’s the bonus – the gift of “paid taxes” that doesn’t count toward your annual gift tax exclusion (currently $16,000 per person).
One of my favorite strategies for IRA owners – and probably one of the most underutilized – is the Qualified Charitable Distribution (QCD). You must be 70.5 years old or older to utilize this strategy. But for the charitably inclined – which means you are giving to the charity anyway – if you make the donation to the charity directly out of your IRA account, it doesn’t pass through your tax return.
Doing this keeps your AGI lower for purposes of the IRMAA threshold and won’t throw you into a higher tax bracket because it doesn’t count as taxable income. You can give up to $100,000 to a qualified charity (Donor Advised Funds don’t qualify). Once you are RMD eligible, the amount donated as a QCD counts toward your RMD. It is such a cool tool! But I sometimes have a tough time getting clients to use it because they miss putting their weekly donation into the offering plate. For clients who do QCDs, the charities are grateful. They get your full year’s contribution up front and don’t have to wait week by week to receive it. Not claiming the donation as income and not deducting it on your tax return, saves you tax dollars. There are three people in the transaction and two of you win. The charity wins. You win. Uncle Sam, not so much.
Don’t get too excited about the possible change in rules extending the RMD age to age 75. We must wait to see what a reconciled bill looks like after the Senate does their thing. According to the WSJ, in the House bill, the delayed RMD age is transitioned to age 73 in 2023, age 74 in 2030, and age 75 in 2033. For those who are forgetful and don’t take their RMD, the bill also proposes to reduce the penalty for not taking the RMD timely, from 50% to 25%, and if you fix the mistake quickly, the penalty goes down to 10%. That would be a welcome relief.
I will be attending the Ed Slott Elite IRA semi-annual conference in Kansas City, May 12-14, and will bring you updates, if there are any, at that time.
Meanwhile, if it makes sense for your personal situation, Roth Conversions and QCD’s could still be strategies for you to consider.