King & Wood, P.A.

Don’t Make these Roth Conversion Mistakes

“Roth conversions get major coverage from the popular press these days.”

When they learn Roths deliver tax-free income, many people practically trip over their own feet to convert money from traditional retirement accounts to Roth accounts. However, without good planning, which includes looking at current and future tax rates, this rush to convert can be a costly mistake, says a recent article, “Roth Conversion Mistakes, Who Knew?” from Financial Advisor.

There are important dynamics to take into consideration before doing conversions, including the impact on the taxable percentage of Social Security benefits. Required Minimum Distributions can lead to larger Medicare Parts B and D premiums because of the income-related monthly adjustment amount.

The advantages of conversion are attractive. If you can afford to pay the taxes upfront and heirs will inherit a Roth, they can let it grow tax-free for a decade. A conversion can be used to create a multi-generational wealth transfer extending ten years past your own demise.

There's much to consider when you start considering the positive reasons to make a conversion.

Procedural errors happen very often. Someone might miss the December 31, 2024, deadline for a 2024 Roth conversion, thinking they have until April 15, 2025, when 2024 IRA contributions are due. The deadlines are different and need to be kept straight.

This is especially true for people doing a “backdoor Roth,” making a non-deductible contribution to a traditional IRA and then converting the account to a Roth. The tax calculation on a Roth conversion considers the year-end balances of the person's traditional retirement accounts. This includes SEP-IRAs and SIMPLE IRAs—not just the account being converted.

This most commonly occurs when someone has a small IRA account from a former employer they may have forgotten about. However, the cost can be substantial.

Another error: the income tax withheld from a Roth conversion counts as a taxable distribution, and if the account owner is under age 59 ½, there’s a 10% early withdrawal penalty.

If you convert an IRA and elect not to have taxes withheld, don’t make the mistake of forgetting to file estimated tax payments. You’ll end up with a tax penalty if you forget.

The most expensive mistake possibly comes from people who know they need to make an estimated tax payment but decide the tax cost of the conversion will be larger than the cash they have on hand, so they choose to let the conversion go. However, in many cases, taxpayers over age 59 ½ are better off converting and having taxes withheld versus not doing the conversion at all.

Reference: Financial Advisor (Dec. 1, 2024) “Roth Conversion Mistakes, Who Knew?”

Estate Planning Questions for Couples with a Big Age Gap

“For couples with an age difference of 10 years or more, assets need to last significantly longer to cover both of their retirements, making the risks of missteps higher.”

Even if it was never an issue in the past, when couples with a significant age gap reach their 60s and 70s, the age difference can present challenges. When one partner is ten or more years younger than the other, assets need to last longer, and the impact of poor planning or mistakes can be far more complex. The article in Barron’s “Big Age Gap With Your Spouse? What You Need to Know” explains several vital issues.

Examine healthcare coverage and income needs. Health insurance can become a significant issue, especially if one partner is old enough for Medicare and the other does not yet qualify. How will the couple ensure health insurance if the older partner retires and the younger depends on the older partner for healthcare? The younger partner must buy independent healthcare coverage, which can be a budget-buster.

Be strategic about Social Security. Experts advise having the older spouse delay taking Social Security benefits if they are the higher-income partner. If the older spouse passes, the younger spouse can get the bigger of the two Social Security benefits. Delaying benefits means the benefits will be higher.

Planning for RMDs—Required Minimum Distributions. Roth conversions may be a great option for couples with a significant age gap. Large traditional tax-deferred individual IRAs come with large RMDs. When one spouse dies, the surviving spouse is taxed as a single person, which means they’ll hit high tax brackets sooner. However, if the couple converted their IRAs to Roths, the surviving spouse could withdraw without taxes.

Estate planning becomes trickier with a significant age gap, especially if the spouses have been married before. Provisions in their estate plan need to be made for both the surviving spouse and children from prior marriages. An estate planning attorney should be consulted to discuss how trusts can protect the surviving spouse, so no one is disinherited. Beneficiary accounts also need to be checked for beneficiary designations.

Couples with a significant age gap need to address their own mortality. A younger partner who is financially dependent on an older partner needs to be involved in estate and finance planning, so they know what assets and debts exist. Life has a way of throwing curve balls, so both partners need to be prepared for incapacity and death.

Plans should be reviewed more often than for couples in the same generation. A lot can happen in six months, especially if one or both partners have health issues.

Reference: Barron’s (May 19, 2024) “Big Age Gap With Your Spouse? What You Need to Know.”

Caregiving and Estate Planning Provides Peace of Mind for All Generations

“With so many responsibilities on a farming or ranching operation, caregiving plans can often get overlooked until it’s too late.”

If your goal is to keep the farm, ranch, or small business in the family, planning, including estate planning and caregiving, is the number one strategy to making it happen. Families may dissolve the farm or business without advance planning to pay for long-term care expenses. A recent article from AgWeek, “Caregiving plans can provide peace of mind for farming and ranching families,” explains what needs to be done.

Part of the issue is that most ranchers and business owners won’t qualify for Medicaid because they own a significant asset. Having to sell off something they’ve worked their entire lives to build is often a result of no planning.

If you have a long-term care insurance policy, it needs to be carefully reviewed to determine what conditions need to be met for benefits to be paid. For example, most policies have a “waiting period,” so you’ll need to plan how to pay for caregiving during the months before the policy kicks in.

There’s also confusion about the difference between Medicare and Medicaid. Medicare is health insurance for medical expenses, while Medicaid is usually used for long-term care and caregiving needs. However, Medicaid is a needs-based program. An estate planning attorney can help the family determine what needs to happen in advance, whether the goal is to protect the farm, ranch, or small business while helping the aging parent become eligible for Medicaid.

Estate planning includes planning for incapacity, which can occur at any time but is more likely as we age. Suppose the individual hasn’t completed a power of attorney, healthcare power of attorney, and other medical directives. In that case, the family will need to go to court to obtain conservatorship or guardianship to take over the person’s financial matters and make healthcare decisions on their behalf. An estate planning attorney can help the family prepare the documents and create a plan.

Having an estate plan in place is also another means of protecting the family’s assets from elder abuse. Everything needs to be documented, and records need to be well-organized so every family member knows where documents are, where assets are and the plan for the inevitable events of aging.

Meeting with an estate planning attorney to create the last will and testament, power of attorney and all other planning documents can minimize the stress and costs involved. Without planning, everything becomes far more complicated, costly and stressful for all concerned.

Reference: AgWeek (May 14, 2024) “Caregiving plans can provide peace of mind for farming and ranching families”

Tax Deductions for Seniors Only

“There are a host of tax breaks available to retirees and older Americans. However, they’re easy to miss.”

Many seniors are missing out on tax deductions and tax savings, according to a recent article from The Wall Street Journal, “Four Lucrative Tax Deductions That Seniors Often Overlook.” The tax code is complicated, and changes are frequent.

Since 2017, there have been several major tax changes, including the Tax Cuts and Jobs Act, the pandemic-era Cares Act and the climate and healthcare package known as the Inflation Reduction Act. Those are just three—there’s been more. Unless you’re a tax expert, chances are you won’t know about the possibilities. However, these four could be very helpful for seniors, especially those living on fixed incomes.

The IRS does offer a community-based program, Tax Counseling for the Elderly. This community-based program includes free tax return preparation for seniors aged 60 and over in low to moderate-income brackets. However, not everyone knows about this program or feels comfortable with an IRS-run tax program.

Here are four overlooked tax deductions for seniors:

Extra standard deduction. Millions of Americans take the standard deduction—a flat dollar amount determined by the IRS, which reduces taxable income—instead of itemizing deductions like mortgage interest and charitable deductions on the 1040 tax form.

In the 2023 tax year, seniors who are 65 or over or blind and meet certain qualifications are eligible for an extra standard deduction in addition to the regular deduction.

The extra standard deduction for seniors for 2023 is $1,850 for single filers or those who file as head of household and $3,000 for married couples, if each spouse is 65 or over filing jointly. This boosts the total standard deduction for single filers and married filing jointly to $15,700 and $30,700, respectively.

IRA contributions by a spouse. Did you know you can contribute earned income to a nonworking or low-earning spouse’s IRA if you file a joint tax return as a married couple? These are known as spousal IRAs and are treated just like traditional IRAs, reducing pretax income. They are not joint accounts—the individual spouse owns each IRA, and you can’t do this with a Roth IRA. There are specific guidelines, such as the working spouse must earn at least as much money as they contributed to both of the couple’s IRAs.

Qualified charitable distributions. Seniors who make charitable donations by taking money from their bank account or traditional IRA and then writing a check from their bank account is a common tax mistake. It is better to use a qualified charitable deduction, or QCD, which lets seniors age 70 ½ and older transfer up to $100,000 directly from a traditional IRA to a charity tax-free. Married couples filing jointly can donate $200,000 annually, and neither can contribute more than $100,000.

The contributions must be made to a qualified 501(c)(3) charity. The donation can’t be from Donor-Advised Funds. This is a great option when you need to take the annual withdrawal, known as a Required Minimum Distribution or RMD, and don’t need the money.

Medicare premium deduction. A self-employed retiree can deduct Medicare premiums even if they don’t itemize. This includes Medicare Part B and D, plus the cost of supplemental Medigap policies or a Medicare Advantage plan. The IRS considers self-employed people who own a business as a sole proprietor (Schedule C), partner (Schedule E), limited liability company member, or S corporation shareholder with at least 2% of the company stock.

Remember, you must have business income to qualify, since you can deduct premiums by only as much as you earn from your business. You also can’t claim the deduction if your health insurance is covered by a retiree medical plan hosted by a former employer or your spouse’s employer’s medical plan.

Reference: The Wall Street Journal (Nov. 29, 2023) “Four Lucrative Tax Deductions That Seniors Often Overlook”

Tax Strategies May Have Impact on Medicare Costs

“One factor that may offset those benefit increases is the size of Medicare Part B premiums, which are typically deducted directly from monthly Social Security checks.”

How much retirees pay for Medicare Part B premiums is based on income levels, and an income increase of even $1 can trigger higher tax rates, explains the recent article, “Year-end tax strategies may affect how much retirees pay for Medicare. Here’s what to know” from CNBC.

Social Security beneficiaries will receive a 3.2% increase in benefits in 2024 based on the annual COLA (Cost of Living Adjustment). According to the Social Security Administration, this will result in an estimated increase of more than $50 per month, bringing the average monthly retirement benefit for workers from $1,848 in 2023 to $1,907 in 2024.

How much beneficiaries will actually receive won’t be known until December, when annual benefit statements are sent out. One factor possibly offsetting those benefit increases is the size of Medicare Part B premiums, which are typically deducted directly from Social Security monthly benefits.

Medicare Part B covers physician services, outpatient hospital services, some home health care services, durable medical equipment and other services not covered by Medicare Part A.

Medicare Part B premiums for 2024 have not yet been announced. However, the Medicare trustees have projected the standard monthly premium possibly being $174.80 in 2024, up from $164.90 in 2023.

Some beneficiaries may pay more, based on income, in what’s known as IRMAA or Income Related Monthly Adjustment Amounts. In 2023, it is the standard Part B premium for those who file individually and have $97,000 or less (or $194,000 or less for couples) in modified adjusted gross income on their federal tax return in 2021.

Monthly premiums can go up to as much as $560.50 per month for individuals with incomes of $500,000 and up, for couples with $750,000 and up.

Beneficiaries receive the same Medicare services regardless of the monthly Part B premium rate.

In 2024, the monthly Part B premiums will be based on 2022 federal tax returns. Beneficiaries need to pay attention to how their incomes may change when implementing year-end tax strategies.

For instance, if you do a Roth conversion, taking pre-tax funds from a traditional IRA or eligible qualified retirement plan like a 401(k) and moving them to a post-tax retirement account, you’ll trigger income taxes, which may trigger higher Medicare Part B premiums later.

People who do end-of-year tax loss harvesting, selling off assets at a loss to offset capital gains owed on other profitable investments, may reduce adjusted gross income and future Medicare premiums.

If you’re taking distributions from IRAs and want to make charitable donations, you might want to make those donations directly from your retirement account, known as a qualified charitable distribution. These funds don’t appear on your tax return and won’t increase income taxes or future Medicare premiums.

Reference: CNBC (Oct. 12, 2023) “Year-end tax strategies may affect how much retirees pay for Medicare. Here’s what to know”

Tasks to Be Done After a Loved One Passes

“Even though the death of a loved one comes with unbearable grief, there are important tasks you must carry out as soon as you’re able.”

If you haven’t dealt with losing a loved one, the days and weeks after a death can be overwhelming. Pain and grief are paired with important tasks that must be done, or unnecessary stress will result, explains a recent article, “11 Financial Steps to Follow After the Loss of a Loved One,” from U.S. News & World Report.

An official declaration of death. If the death occurs in a hospital, the hospital will issue it. If the death occurred at home, a medical professional or first responder would make the declaration.

Obtain a death certificate. This usually comes from the funeral home. You’ll want to get five to ten original certificates, which will be used for various legal and financial matters.

Gather financial documents. This includes estate planning documents, a will, a trust, bank and investment account information, utilities and bills, insurance policies and tax returns.

Reach out to advisors. This includes the estate planning attorney, financial advisor, CPA and other professionals working with the deceased. They will be able to offer guidance as you go through the process of managing the estate.

Contact any government agencies. If your loved one was receiving benefits from Social Security, the Veterans Administration, Medicare, Medicaid, or any other government agency, you must notify them of the death. The funeral home may have already sent the SSA a notification. You may still want to confirm if it has been sent, as the ultimate responsibility for notification is the surviving spouse or adult child.

Contact financial institutions. The financial institutions, including commercial banks, brokerage accounts and insurance companies, will all need to receive an original death certificate. If there is a POD (Payment on Death) order, the balance on accounts will be transferred to the designated beneficiary. If there are life insurance policies, you’ll need to find the policy and identify the designated beneficiary.

Avoid identity theft. Contact credit agencies, including Experian, Equifax and TransUnion, to notify them of the death. You may need to contact one for the others to become aware. You should also close the social media accounts of the deceased. Depending on the platform, you may only be able to memorialize the account instead of deleting it.

Other important institutions to contact. The post office will need to be notified, although you may first want to have the person’s mail sent to your home directly. The motor vehicle department needs a notification of death to stop renewing licenses. Unions and professional, service, or fraternal organizations should be notified. There may be survivor’s benefits.

Voter registration. You’ll want to notify the deceased’s voter registration agency, so they can remove their name from voting rolls.

Prepare the final tax return. There are two tax returns to be aware of—the final income tax returns and the estate tax returns. Your estate planning attorney will know the deadlines for both.

Filing the will with the probate court. Once the will goes through probate and is approved by the court, the executor will be able to distribute the deceased’s assets in accordance with the will. If there is no will, the distribution will be overseen by the court and follow the state’s intestacy laws.

Settle any remaining debts. In most cases, the remaining liability on a mortgage or car loan will be payable by the person inheriting them. All other forms of debt, like student loans, credit cards and medical loans, will be charged against the decedent’s estate.

Carrying out these tasks during a difficult time is not easy. An experienced estate planning attorney can help make the process easier for all concerned.

Reference: U.S. News & World Report (Sep. 1, 2023) “11 Financial Steps to Follow After the Loss of a Loved One”

What Kind of Medicare Plan Should You Have?

“If you’re thinking about retiring, or are already covered by Medicare, you might be overwhelmed by all the choices out there.”

It’s no wonder people make poor choices about their plans, which can be disastrously expensive since the older we get, the more we need healthcare. A recent article from The Wall Street Journal, “The 5 Biggest Mistakes People Make When Picking a Medicare Plan,” takes a look at the mistakes people make, how to make better choices and which plans are recommended.

Underestimating the costs of traditional Medicare is one of the biggest mistakes. Traditional Medicare, which the government offers, has three parts: A, B, and D. Part A covers care for inpatient hospital services, among other things, and Part B is for physician services. Part D is for prescription services.

The appeal of traditional Medicare is the ability to visit any hospital, doctor, or healthcare provider without a referral or prior authorization of services. If you have doctors you trust, do a lot of domestic travel, need care in different places, or think you might benefit from a treatment a private insurer may deny, this is your best choice.

Many people don’t even consider the options when choosing traditional Medicare. Instead, they allow it to be chosen for them. If you claim Social Security before age 65, which nearly half of Americans do, the Social Security Administration automatically enrolls you in traditional Medicare when you turn 65. It’s the path of least resistance. However, this might not always be the best fit.

The flexibility of the plan comes with certain costs. Part A premiums are often zero for those who have worked for at least ten years. However, Part B carries premiums based on household income. If your household modified adjusted gross income exceeds about $370,000 (or individually more than about $180,000), those premiums can rise to more than $500 a month per individual.

With traditional Medicare, a hospitalization has a $1,600 deductible. A hospital stay longer than 60 days comes with a $400 co-payment daily, and a skilled nursing facility stay of more than 20 days will cost $200 a day. You’ll also be responsible for 20% of the Medicare-approved cost of physician services during the hospital stay.

Another big mistake is underestimating the costs of Medicare Advantage plans. Medicare Advantage is an alternative to traditional Medicare. First, you sign up for Parts A and B, and then you can sign up for a Medicare Advantage plan, also known as Part C. This option is a bundle of A, B, and D, delivered by private insurance companies approved by Medicare. Some plans do not include prescription drug coverage, so you must check carefully.

Medicare Advantage companies are paid a fixed amount of money monthly by the government, so they have an incentive to reduce costs by providing better coverage for medicines that will keep you out of the hospital, However, there are coverage issues. Zero premiums apply to Part A and D, meaning you still pay the Part B premium.  The cost savings on out-of-pocket costs apply only if you stay in network. If you go out of network, your care can quickly become extremely expensive. The in-network and out-of-network distinctions limit where you can get your medical care. If you need access to a certain hospital or healthcare provider and they are not in the network, there may be better options for you.

Choosing traditional Medicare without Medigap, supplemental insurance sold by private companies helps traditional Medicare beneficiaries pay for cost-sharing in Parts A and B. Nearly 10% of those who chose traditional Medicare don’t have supplemental coverage.

Neglecting to get prescription coverage is another big and expensive mistake. You aren’t automatically enrolled in Part D—you must proactively select this plan covering prescription drugs. You have only 63 days after your initial enrollment in Medicare to enroll in Part D. If you miss this window and don’t have any other drug coverage, your Part D premium will be permanently higher.

Finally, many people feel this is too confusing to manage on their own, so they turn to a broker, which makes sense. You should know brokers work on commission, receiving payment from insurance companies. Make sure to ask your broker how they are paid, ask about the plans they are not telling you about and whether or not the discounts you are being offered at sign-up will go away in a year or so.

Reference: The Wall Street Journal (Aug. 15, 2023) “The 5 Biggest Mistakes People Make When Picking a Medicare Plan”

How to Pay for Hearing Aids

“More than 48 million Americans, including two in three adults over 70, live with hearing loss.”

Untreated hearing loss has been linked to a higher level of depression, cognitive decline, dementia, falls, visits to the emergency room, and hospital stays. Despite this, says an article from ncoa Adviser, “Financial Assistance for Hearing Aids: A Complete Guide for Older Adults,” fewer than 15% of adults who need hearing aids use them, and the average person takes nearly nine years to go about getting a pair after being told they have hearing loss.

Part of the reason for the delay is financial. Resources for getting hearing aids vary from state to state, and even county to county, which can be confusing. Here’s how to get started.

First, check with your health insurance company to see what’s covered and ask about additional services. You’re not just buying an appliance. Hearing aids require activation and fitting, and other unexpected out-of-pocket costs may occur. Sometimes the easiest way to verify insurance is to have a hearing aid clinic check into it.

Except in five states—Arkansas, Connecticut, Illinois, New Hampshire, and Rhode Island—insurance providers are not required to cover hearing aids as part of health care for adults. Medicare Parts A and B don’t cover the cost of hearing aids or fitting exams. Still, Medicare Part B covers hearing and balance exams ordered by a doctor and an annual audiology appointment to evaluate hearing loss. Whether or not Medicare Advantage, aka Medicare Part C, provides coverage depends upon the plan.

Medicaid coverage varies by state and plan. Many people with Medicare and Medicaid can sign up with select insurance companies and get coverage at no additional cost, but the coverage varies. Also, the quality of the hearing aids may differ.

Active duty military service members and family members diagnosed with hearing loss meeting the coverage criteria may be eligible to receive hearing aids through a TRICARE-approved provider. For veterans, the VA has hearing aid benefits. They should reach out to their local office or representative. The VA website has information on how to apply for VA hearing health care and find the nearest provider.

Federal employees of the American Federation of Government Employees (AFGE) have access to discounted hearing aids, including a free hearing exam, discounted hearing aids, and aftercare support.

Those with mild to moderate hearing loss can now consider over-the-counter hearing aids. Note that the cost of the device you are buying is a third of the price. The rest of the costs are services, so be sure what services are bundled into the offerings. Instead of relying on online reviews, research trusted sources. You’ll want to clearly understand the return policy, warranty coverage for damage and loss, and customer service.

Reference: ncoa Adviser (July 2, 2023) “Financial Assistance for Hearing Aids: A Complete Guide for Older Adults”

What Kind of Medicare Plan Should You Have?

“If you’re thinking about retiring, or are already covered by Medicare, you might be overwhelmed by all the choices out there.”

It’s no wonder people make poor choices about their plans, which can be disastrously expensive since the older we get, the more we need healthcare. A recent article from The Wall Street Journal, “The 5 Biggest Mistakes People Make When Picking a Medicare Plan,” takes a look at the mistakes people make, how to make better choices and which plans are recommended.

Underestimating the costs of traditional Medicare is one of the biggest mistakes. Traditional Medicare, which the government offers, has three parts: A, B, and D. Part A covers care for inpatient hospital services, among other things, and Part B is for physician services. Part D is for prescription services.

The appeal of traditional Medicare is the ability to visit any hospital, doctor, or healthcare provider without a referral or prior authorization of services. If you have doctors you trust, do a lot of domestic travel, need care in different places, or think you might benefit from a treatment a private insurer may deny, this is your best choice.

Many people don’t even consider the options when choosing traditional Medicare. Instead, they allow it to be chosen for them. If you claim Social Security before age 65, which nearly half of Americans do, the Social Security Administration automatically enrolls you in traditional Medicare when you turn 65. It’s the path of least resistance. However, this might not always be the best fit.

The flexibility of the plan comes with certain costs. Part A premiums are often zero for those who have worked for at least ten years. However, Part B carries premiums based on household income. If your household modified adjusted gross income exceeds about $370,000 (or individually more than about $180,000), those premiums can rise to more than $500 a month per individual.

With traditional Medicare, a hospitalization has a $1,600 deductible. A hospital stay longer than 60 days comes with a $400 co-payment daily, and a skilled nursing facility stay of more than 20 days will cost $200 a day. You’ll also be responsible for 20% of the Medicare-approved cost of physician services during the hospital stay.

Another big mistake is underestimating the costs of Medicare Advantage plans. Medicare Advantage is an alternative to traditional Medicare. First, you sign up for Parts A and B, and then you can sign up for a Medicare Advantage plan, also known as Part C. This option is a bundle of A, B, and D, delivered by private insurance companies approved by Medicare. Some plans do not include prescription drug coverage, so you must check carefully.

Medicare Advantage companies are paid a fixed amount of money monthly by the government, so they have an incentive to reduce costs by providing better coverage for medicines that will keep you out of the hospital, However, there are coverage issues. Zero premiums apply to Part A and D, meaning you still pay the Part B premium.  The cost savings on out-of-pocket costs apply only if you stay in network. If you go out of network, your care can quickly become extremely expensive. The in-network and out-of-network distinctions limit where you can get your medical care. If you need access to a certain hospital or healthcare provider and they are not in the network, there may be better options for you.

Choosing traditional Medicare without Medigap, supplemental insurance sold by private companies helps traditional Medicare beneficiaries pay for cost-sharing in Parts A and B. Nearly 10% of those who chose traditional Medicare don’t have supplemental coverage.

Neglecting to get prescription coverage is another big and expensive mistake. You aren’t automatically enrolled in Part D—you must proactively select this plan covering prescription drugs. You have only 63 days after your initial enrollment in Medicare to enroll in Part D. If you miss this window and don’t have any other drug coverage, your Part D premium will be permanently higher.

Finally, many people feel this is too confusing to manage on their own, so they turn to a broker, which makes sense. You should know brokers work on commission, receiving payment from insurance companies. Make sure to ask your broker how they are paid, ask about the plans they are not telling you about and whether or not the discounts you are being offered at sign-up will go away in a year or so.

Reference: The Wall Street Journal (Aug. 15, 2023) “The 5 Biggest Mistakes People Make When Picking a Medicare Plan”

What are RMD Rules for 2023?

“The SECURE 2.0 Act, which was signed into law in December 2022, changes the RMD rules for retirement savers beginning in 2023.”

After a certain age, retirement account owners are required to take minimum distributions from traditional IRAs and 401(k)s. The SECURE 2.0 Act has changed the rules, reports the article “New RMD Rules for 2023” from U.S. News & World Report.

Before the SECURE 2.0 Act, the age to start RMDs was 72 for retirement accounts, including both traditional IRAs and 401(k)s. Now, the RMD age has increased in two steps. Starting in 2023, the RMD age increases to 73, and in 2033, the RMD age will increase to 75. If you were born between 1951 and 1959, you’ll need to start RMDs after age 73. Born after 1960? You can delay RMDs until after age 75.

There are important deadlines, and while you get extra time to take your first RMD, you must take subsequent RMDs every calendar year.

Here’s the twist: remember, RMDs are taxable. If you take your first RMD in 2023 because you celebrate your 72^nd birthday that year, you’ll have some decisions to make. You can take the RMD by December 31, 2024, or delay it to no later than April 1, 2025. But if you delay it to April 2025, you’ll take two RMDs in one tax year.

If your income from Social Security and other sources is more than you need, those higher ages for RMDs have their advantages. Retirement savings accounts may grow tax-free for a longer period of time. The change may also bring savings in Medicare costs. The price of Medicare premiums is tied to income. When retirees take distributions from pre-tax retirement accounts, it increases their income and their premiums. By waiting on withdrawals, income can be lowered, leading to lower Medicare premiums at that time.

However, the delay in taking distributions may also lead to higher taxes during later stages of retirement. If you don’t take funds early, you may find yourself with higher RMDs later, leading to larger tax bills.

Account owners who don’t take an RMD at the right time usually face harsh penalties. Prior to the SECURE 2.0 Act, the tax penalty was 50% on their required amount not withdrawn. Now the penalty is 25%. If the mistake is corrected quickly, the penalty can even decline to 10%, as long as the person can demonstrate the missed RMD was due to an error and reasonable steps are being taken to resolve the issue.

There are changes to qualified charitable distributions as well. Account owners age 70 ½ and older may now make IRA qualified charitable distributions of up to $100,000 per year without owing income tax on the transaction, which can count as their RMD for the year. The qualified charitable distribution limit is now linked to inflation and may increase in future years. A one-time gift of $50,000 may be made directly to an eligible entity through a charitable gift annuity, charitable remainder unitrust or charitable remainder annuity trust.

Based on the SECURE Act 2.0, Roth 401(k) account owners no longer have to take RMDs at all. This aligns the Roth 401(k) with Roth IRAs, which also do not require any distributions in retirement.

Reference: U.S. News & World Report (Feb. 10, 2023) “New RMD Rules for 2023”