Austin Texas Estate Planning Blog

Is Extending Required Minimum Distributions (RMDs) a Good Thing

Is Extending Required Minimum Distributions (RMDs) a Good Thing?

March 28, 2023 • | Law Office of Zachary D Kamykowski, PLLC
The first SECURE Act extended the beginning date for taking required minimum distributions from the year after the account owner reaches age 70½ until they reach age 72. Just three years later, ‘SECURE Act 2.0’ has extended this age to 73, and offers a further provision for extending it again, to age 75, beginning in 2033.

Are these extensions a good thing or a trap for people not following the latest rules? A key concept is a difference in how couples and singles are taxed. The income level at which singles reach tax bracket thresholds is half that of married people filing jointly, explains a recent article titled “Are Extended RMDs A Gold Mine Or Tax Trap?” from Financial Advisor.

For example, suppose a retired couple reaches 70½ this year. They’ll have an RMD of $89,450 from their combined $2 million plus in IRAs. They also receive $27,700 in interest and dividend income during the year—equal to the standard deduction for a married couple filing jointly. The federal income tax liability would be $10,294 (not including taxes on Social Security benefits).

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The “single filer” penalty is an issue. Let’s say they opt not to withdraw the $89,450 during 2023. Instead, they wait, and one of the spouses dies. The surviving spouse then withdraws $89,450 as a widow. The survivor’s federal income tax liability on the same amount becomes $18,192, or almost 77% higher than if both spouses were still living.

Moreover, the children of our example will likely face a higher income tax rate on what’s left in their parents’ IRA when both pass away. They will probably be in their peak earnings years and have only ten years to take the entire payout after their parents die.

Finally, if the married couple takes IRA withdrawals earlier rather than later, they’ll see a step-up basis for all the after-tax funds they’ve been allowed to appreciate for the rest of their lives. This eliminates all income tax on the appreciation. This is a crucial income tax benefit you don’t get from IRA receipts after the account owner’s death. Perhaps Congress had this in mind when extending the starting date for RMDs not once but thrice.

One could argue that singles, including surviving spouses, will see IRAs grow more if they put off distribution even longer. However, eventually more significant amounts may push individuals or families into a higher income tax bracket later on, and the undistributed IRA would not get a step-up in income tax basis on the death of the original owners. The undistributed IRA amount also can’t be rolled into a Roth IRA.

The exemplary couple could improve their tax bracket strategy by increasing withdrawals before they turn 70 ½, as long as they are retired and not in a high-income tax bracket. Increasing RMDs later in life makes it possible to increase the federal income tax bracket and risk triggering the single-filer penalty on the widowed spouse.

These changes in the law, including extending RMDs, may create new opportunities. Alternatively, your existing estate plan may not be properly structured to address the changes brought about by Congress. Estate planning for the SECURE Act means if you haven’t had your estate plan reviewed in the last two or three years, it’s time to make an appointment with an Austin estate planning attorney. Book a Call.

Reference: Financial Advisor (March 1, 2023) “Are Extended RMDs A Gold Mine Or Tax Trap?”

Law Office of Zachary D Kamykowski, PLLC

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