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Marquette Financial Planning Insights - Secure Act 2.0 Thumbnail

Marquette Financial Planning Insights - Secure Act 2.0

Investment Marquette Updates Tax Planning

RMDs Under Secure Act 2.0

On December 29, 2022, President Biden signed the SECURE 2.0 Act of 2022 ("SECURE 2.0") as part of the Consolidated Appropriations Act of 2023. The law includes a provision that increases that starting age for RMDs to 73, eventually allowing some IRA owners to begin RMDs as late as age 75! However, those who have already started RMDs must continue. 

The following table provides a snapshot of when RMDs must being based on your birthdate.

RMDs Frequently Asked Questions

Many IRA owners have questions about the rules related to RMDs (especially in their first year), so let’s answer a few. 

When does my RMD have to be taken? Your initial RMD has to be taken by April 1 of the year after you attain RMD age (see chart above). For example, if you are RMD age on March 1, 2024, you have until April 1, 2025, to take your first RMD. All RMDs taken in subsequent years must be taken by December 31 of each year.

Is waiting until April 1 of the following year to take my first RMD a bad idea? The IRS allows you three extra months to take your first RMD, but it isn’t necessarily doing you a favor. Your initial RMD is taxable in the year it is taken. If you postpone your first RMD into the following year, then the taxable portions of both your first RMD and your second RMD must be reported as income on your federal tax return for that following year and may drive up your taxes.

How do I calculate my first RMD? For an IRA owner, RMDs are based on your life expectancy and are calculated using the IRS Uniform Lifetime Table. We handle this process for you if your Traditional IRAs are held with Marquette Wealth Management! We calculate your RMD and set up instructions to your liking (one-time distribution, monthly withdrawal, etc.). If this is your first year taking an RMD, we will be talking through this in more detail during our annual meeting.

Please note that recorded distributions will be provided from Schwab via a 1099-R to record the RMD and any other distributions on your tax return.

Also note, the IRS updated it’s tables for 2022 and beyond to allow for longer life expectancies, which could drive down your RMDs over time.

When I take my RMD, do I have to withdrawal the whole amount? No. You can also take it in smaller (ex: monthly) withdrawals over the course of the year. We can help schedule withdrawals based on a cadence that works for you.

What if I have more than one Traditional IRA? We then calculate your total RMD (by calculating the RMD for each Traditional IRA you own) using the IRA balances on the prior December 31. This total is the basis for the RMD calculation. You can take your RMD from a single Traditional IRA or multiple Traditional IRAs. We can also help facilitate this for you (assuming all accounts are with Marquette Wealth Management)!

NOTE: SECURE 2.0 Changes!  

Those of you who have taken RMDs in previous years may know that if you fail to take your annual RMD (or take our less than the required amount), the IRA will penalize you. You would not only owe income taxes on the amount not withdrawn, but you would also owe 50% more. The SECURE 2.0 Act reduces the penalty from missing an RMD from a 50% penalty to a 25% penalty. Additionally, if the RMD is corrected in a “timely fashion,” it would reduce the penalty again down to 10%.

If you have any questions regarding RMDs or withdrawals from your IRA(s) in general, please reach out and let's discuss!

Qualified Charitable Distributions (QCDs) under SECURE Act 2.0

Some people choose to donate their RMD to a qualified charity via a qualified charitable distribution (QCD). Doing this has many benefits, including tax savings. *Important to note: QCDs must be completed prior to the RMD for tax benefits.*

Qualified charitable distributions (QCDs) are a way for individuals who are at least 70½ years old to donate money directly from their Traditional IRAs to eligible charitable organizations without incurring taxes on the distribution. Effective 2024, each taxpayer can donate up to $105,000 of their RMD to eligible charities – 501(c)(3) organizations – as a QCD from their IRA in any given year. 

The QCD is made directly from the IRA to each charity which allows the amount donated to pass through to the charity versus being included in a taxpayer’s adjusted gross income. This strategy can be especially impactful for individuals who do not itemize their deductions and would otherwise not receive a tax benefit for their donations – meeting philanthropic goals and reducing taxable income… who doesn’t like that?!

If you are of RMD age (or reach age 70 ½) and are interested in this strategy, we can help facilitate any charitable donations you would like to make prior to fulfilling your RMD for the year.

529 Plan Rollover to Roth IRAs

In previous years, if you wanted to withdrawal unused funds from a 529 plan (account was overfunded or beneficiary did not attend a post-secondary school), any withdrawals that were not used for qualified education expenses were subject to federal income tax and a 10% penalty on earnings. Starting in 2024, unused funds within a 529 plan used to fund education goals can be rolled over into a Roth IRA for the benefit of the 529 plan beneficiary; however, there are some rules.

  • The 529 plan must be under the beneficiary’s name for a minimum of 15 years. Any contributions made within the last 5  years cannot be transferred to a Roth IRA.
  • The lifetime transfer limit from a 529 plan to a Roth IRA is $35,000

Contributions are subject to Roth IRA limitations:

  • The maximum contribution to a Roth IRA in 2024 is $7,000 (plus $1,000 catch up for individuals over the age of 50).
  • The beneficiary must have earned income, and the amount that can be rolled over is the lesser of earned income or the IRA contribution limit (ex: if earned income is $3,000, contribution is limited to $3,000)
  • Beneficiary must be under the income limit for Roth IRA contributions 
    • The income phase-out range for single/head of household taxpayers is between $146,000 and $161,000; for married couples filing jointly, the income phase-out range is between $230,000 and $240,000.
  • The IRS also prefers 529 accounts be opened for 15 years prior to rolling into a Roth IRA (to make sure people aren’t using 529 accounts as a pass-through) and contributions halted 5 years prior to rolling.

We will continue to monitor this approach for any clients who have or are currently contributing to a 529 plan for a family member. If there is an opportunity to take advantage of this strategy, let’s discuss!

Source: www.irs.gov