Close Close
Sign In
Newsletters
Popular Financial Topics Discover relevant content from across the suite of ALM legal publications From the Industry More content from ThinkAdvisor and select sponsors Investment Advisor Issue Gallery Read digital editions of Investment Advisor Magazine Tax Facts Get clear, current, and reliable answers to pressing tax questions
Luminaries Awards
Podcast Center Video Center Webcasts Resource Center Events
About ThinkAdvisor Contact Us Advertise With Us Asset & Logo Licensing Sitemap Terms of Service Privacy Policy Copyright © 2024 ALM Global, LLC. All Rights Reserved.
ThinkAdvisor
Christine Benz

Retirement Planning > Spending in Retirement > Required Minimum Distributions

Here’s Some Good News About RMDs in 2023: Christine Benz

By John Manganaro

X
Your article was successfully shared with the contacts you provided.

What You Need to Know

  • One silver lining of difficult markets in 2022 is lower required minimum distributions for many retirees this year.
  • Retirees are also benefiting from added RMD flexibility created by the Secure Act legislation.
  • Though penalties for missed RMDs have been substantially lowered, that might not actually be a good thing for those who make mistakes.

At the start of the fourth quarter of 2023, millions of American retirees are wondering how they will handle required minimum distributions from tax-advantaged retirement accounts. According to Morningstar’s Christine Benz, many are finding that their 2023 RMDs are smaller than anticipated.

This is a result of a few interrelated factors, Benz says, including poor market performance in 2022 and recent rule changes introduced in landmark legislation known colloquially as the Secure Act and the Secure 2.0 Act.

Benz, Morningstar’s director of personal finance and retirement planning, shares this insight in a recently published video interview posted on the firm’s website. According to Benz, more RMD flexibility this year means that many retirees will be able to effectively minimize their tax obligations, and some early retirees will be able to forgo making RMDs entirely.

As Benz emphasizes, advisors can help older clients by coordinating their RMDs with other sources of income, and they can help younger clients make moves that can significantly lower their expected RMDs.

Older RMD Age Adds Flexibility

The Secure Act of 2019 increased the RMD age from 70.5 to 72 years, and the Secure 2.0 Act subsequently increased the age again — to 73 — starting in 2023. Under Secure 2.0, this age is to increase once more in 2033.

“It’s set to go all the way out to 75 eventually, so people may be able to push off that date at which they need to take those distributions,” Benz explained. “There are reasons that people really like to delay those RMDs. One is that RMDs can push them into a higher tax bracket, and that can cause some other knock-on tax effects.”

As Benz points out, those adjustments to the starting date offer potentially powerful tax-planning opportunities between one’s retirement age, which could be in the late 50s or early 60s, and the RMD age.

“That provides an opportunity to do IRA conversions in that period when your income tax rate may be at a low ebb relative to what it will be once those RMDs come online,” she explained.

Lower Penalties for Missed RMDs

Another factor affecting retirees this year is that the penalties for missing RMDs have gone down, again thanks to the Secure 2.0 Act.

“The tax experts I’ve talked to differ a little bit on this point,” Benz said. “So, it had been this 50% penalty on any amount that you should have taken but didn’t take. That was, obviously, a catastrophic penalty, and now it’s going to a 25% penalty.”

A halving of this penalty will be a good thing for investors who find themselves running afoul of the rules and facing enforcement actions from the Internal Revenue Service. And, if they are able to prove that they didn’t miss the RMDs on purpose, a retiree can potentially get the penalty reduced to 10%.

“What I hear from people who focus on tax planning is that they think that the IRS may actually be a little bit more serious about actually levying this penalty on people who do miss their RMDs,” Benz warned. “So, as always, it’s a date that you don’t want to mess around with. You need to get that RMD out by Dec. 31 of the tax year.”

In the past, Benz said, when retirees faced the 50% penalty, very few people actually ended up paying it because it was fairly easy to prove that they weren’t trying to skirt the distribution.

“Now it sounds like the penalty will potentially be a little harder to get out of, if you inadvertently miss the RMD,” she warned.

RMD Silver Lining of Rocky Markets

As Benz explains, the bigger reason that many people might see lower RMDs for 2023 is that the U.S. market didn’t have such a great year in 2022.

“We had a pretty big drop in the stock market, both U.S. and non-U.S. stocks,” Benz recalls. “Bonds did not have a great year, either. So, many investors had declining balances at the end of 2022 versus where they were at in 2021. So, even though your RMDs nudge up a little bit as you age, many people, my guess is, would probably see lower RMDs as they’re calculating them in 2023, because they’re calculated on that year-end 2022 balance.”

Benz encourages investors and advisors to take advantage of this moment in other ways, too.

“Prune your highly appreciated securities,” she suggested. “Use those to address your need to take an RMD. Take a good look at your portfolio and how it’s situated in terms of your target asset allocation. Use your RMD to get your portfolio back into balance. It’s a little bit of a freebie from a tax standpoint.”

John Manganaro

NOT FOR REPRINT

© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.