Navigating the Complex World of Retirement Withdrawals
As you approach the golden years, it’s essential to understand the intricacies of retirement withdrawals. After decades of building your nest egg, you’ll eventually need to take required minimum distributions (RMDs) from pretax retirement accounts. However, the first RMD can be particularly tricky, according to financial experts.
The Age Factor
Since 2023, most retirees must begin RMDs at age 73. The first deadline is April 1 of the year after you turn 73, and December 31 for future withdrawals. This applies to tax-deferred individual retirement accounts, most 401(k) and 403(b) plans.
Taxes and Timing
Pre-tax retirement withdrawals incur regular income taxes. By comparison, profitable assets owed for more than one year in a brokerage account are subject to long-term capital gains taxes of 0%, 15%, or 20%. The timing of your first RMD is crucial, as it can significantly impact your adjusted gross income (AGI).
Avoiding Unexpected Tax Consequences
If you wait until April 1 after turning 73 to take your first RMD, you’ll still owe the second one by December 31. This means you’ll take two RMDs in the same year, potentially triggering unexpected tax consequences. For instance, boosting AGI can lead to income-related monthly adjustment amounts (IRMAA) for Medicare Part B and Part D premiums.
Strategic Planning
To minimize tax implications, it’s essential to run the numbers and consider your account balances and tax projections. If you’re age 73 and just retired in 2024, it might make sense to delay your first RMD until April 1, as 2025 could be a lower-income year. However, your RMD is calculated using your pre-tax retirement balance as of December 31 from the prior year, meaning 2025 RMDs are based on year-end 2024 balances.
Expert Advice
Certified financial planners Jim Guarino and Abrin Berkemeyer emphasize the importance of being tactical and savvy when taking the first distribution. “You really have to run the numbers” to see if it makes sense to incur more income in 2024 or 2025, based on account balances and tax projections, Guarino warns.
By understanding the complexities of RMDs and taking a strategic approach, you can minimize tax implications and ensure a comfortable retirement.
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