Planning on RMD income

It’s Required Minimum Distribution season and there are some important elements to understand before calculating and withdrawing funds from your IRA accounts. 

Throughout your career, you deferred taxes by putting money into your IRA or 401(k) accounts and now the time has come to pay the taxes. Your broker or financial advisor can help you calculate and withdraw this distribution. 

Your first RMD is generally when you turn 73. (If you were born on or after January 1, 1960, your first RMD is at age 75.) Figure I illustrates the RMD age for account owners.  

 

The RMD is the amount that you must withdraw from your tax deferred retirement accounts. RMDs are generally determined by dividing the account value as of December 31st of the previous year by the life expectancy distribution period of the calculation year as illustrated in Figure II. 

 

It’s important to remember that your first RMD is due April 1st of the year after you reach RMD age. But be careful – if you defer your first withdrawal, you will have to take two RMDs in that year. Only do this with careful thought and planning with your advisor. 

*Note: Your RMD calculation will be a little different if your sole beneficiary is a spouse who is more than 10 years younger than you. If this is the case, then you are required to use Table II (Joint Life and Last Survivor Expectancy) in Appendix B as shown in the IRS Publication 590-B (2024) (“Distributions from Individual Retirement Arrangements (IRAs)”). For the most part, this will result in a smaller RMD calculation than you would otherwise have. 

You calculate your RMD by dividing your account balance at the end of the previous year by the joint life and last survivor expectancy from Table II. 

For example: You have a traditional IRA with an account balance of $100,000 at the end of 2024. Your spouse, who is the sole beneficiary of your IRA, is 11 years younger than you. You turn 75 in 2025, and your spouse turns 64. You would use Table II. Your joint life and last survivor expectancy is 25.3, making your RMD for 2025 $3,953 ($100,000 ÷ 25.3). Source

Taking More than the Minimum 

You may take more than the minimum requirement. Using these accounts for income or covering large expenses is an important part of many people’s financial plan. You may be concerned about what the IRS might say, but do not worry. While the IRS requires a minimum withdrawal, they cannot tell you what your budget needs are or what your portfolio can sustain. 

What You Can Do with this Money 

Once you withdraw the money from the account, it’s just your money! You can do whatever you like. Spend it, save it, give it away! If you want to keep the money invested, move the cash to a taxable brokerage account (like an individual or joint account) and reinvest there. It can’t stay in the IRA. 

 

Taking Less 

If you decide not to take the minimum or more than the minimum, it’s most important to avoid taking funds below the minimum requirement. Leaving your RMD in the account may result in an up to 25% penalty tax on the amount not distributed. There are several ways to satisfy the RMD but simply moving it into another IRA or rolling one deferred account into another does not satisfy the RMD.  

While you can still convert your IRA to a Roth IRA, this does not satisfy the RMD either. If you are still working, you may be eligible to contribute to your IRA – this is allowed, but you must still take your RMD (as will be explored later). 

Taxation 

You’ve used this account to reduce your taxes in the past, and the IRS wants its cut. Withdrawals are taxable income that can push you into a higher bracket, raise Medicare premiums, and affect Social Security taxation. But if you don’t need the money, and want to send it to charity instead, you may be able to make significant savings with Qualified Charitable Distributions (QCD).  

Charitable Giving 

With the current standard deduction, fewer than 10% of tax returns are able to deduct charitable gifts. Qualified Charitable Distributions (QCDs) satisfy your RMD while excluding the gift from your adjusted gross income. If you do not itemize your deductions, you may be able to lower your taxes and still take advantage of the higher standard deduction. The money must go directly from the IRA to charity - work with your custodian or advisor to get this right. Figure III illustrates. 

 

Withdrawals from a pre-tax IRA, including your RMD, generally count towards your adjusted gross income (AGI). You are taxed on your AGI minus your deductions. If you do not itemize your deductions, you can reduce your AGI with a Qualified Charitable Distribution and still use the generous standard deduction. This reduces your taxable income and your total taxes owed. 

Multiple retirement accounts 

If you have multiple IRAs, you may be able to withdraw the total RMD from a single IRA. You must calculate the RMD for each eligible account. However, for 401(k)s and 457(b)s, you must take the RMD from each account. 

You may want to consolidate IRAs and other retirement accounts BEFORE the year you must begin taking RMDs to simplify the process. 

Inherited IRAs  

Beneficiary IRAs have more complex tax rules. If you inherit from a spouse, you can treat the account as your own. If you inherit from anyone else, in most cases, you must withdraw the account within 10 years and take RMDs each year until then.  It is important to both follow the rules and honor the memory of the person who left you an IRA. 

Thinking about distributions and taxes for your heirs is a big part of estate planning. Make sure that you review your beneficiaries as part of this process. 

Avoid RMDs with Roth Conversions 

Plan ahead to avoid RMDs with Roth conversions. Your Roth IRA is not subject to RMDs. Distributions to you or your beneficiaries are not taxable. By converting your pre-tax IRA to a Roth IRA, you will not have to take the RMD out. The conversion does count as taxable income, but this could potentially generate tax savings in the future. This requires careful planning as shown in Figure IV. 

You must satisfy your RMD before you can convert any additional funds. If you don’t, the funds can’t be converted to a Roth account where it would be tax free. This can be a big benefit to your beneficiaries who may face steep distributions in some of their highest earning years. 

 

Federal Reserve Primer

The following blog was written by Nancy Lottridge Anderson, Ph.D., CFA

The Federal Reserve was created by the Federal Reserve Act of 1913. It was a response to the busts and booms of the late nineteenth century, with the final straw being the Panic of 1907. A small group of financiers met at Jekyll Island in secret to form the framework of a central bank. The idea wasn’t to make recessions things of the past but to smooth out the business cycle, making its gyrations tolerable for regular folks.

Alexander Hamilton first argued for a central bank at the beginning of our history as a country. The idea was resisted. Should we interfere with natural economic forces? Wouldn’t we cause more harm than good? It’s the basic argument between two prominent economists, Keynes and Hayek. 

Hayek’s theory is that self-correction will occur. Gradually, supply and demand will align, and an equilibrium will be reached. This is true, but how long will it take for this to occur? As Keynes said, “In the long run, we’re all dead.” Keynes’s argument was a winning one for politicians being pressured to “do something” to alleviate the suffering of the everyman who was subject to the whims and poor decisions of those at the top.

The Federal Reserve, affectionately known as The Fed, was created to handle one side of the equation in dealing with a financial crisis. Monetary policy, the control of interest rates, is the purview of The Fed, and is the surest and quickest way to have an impact on the overall economy.

How does The Fed control interest rates? They have three tools. 

1. Adjust the reserve requirement. Each member bank must maintain a certain portion of their deposits in their Federal Reserve account. Reducing the reserve requirement encourages banks to use more cash for loans. This will lower interest rates. Increasing the reserve requirement forces banks to reduce lending and results in higher rates. The Fed rarely uses this tool.

2. Adjust the discount rate. This is the rate the Federal Reserve charges member banks for loans. Lowering the discount rate gives member banks cash to loan out, hence lower rates overall. Raising the discount rate discourages lending and results in higher rates. Again, this tool is not used often but may occur when The Fed “opens the window,” meaning they are lending money to member banks.

3. Use open market operations to target a particular Fed Funds Rate. This is the rate member banks charge EACH OTHER. Open market operations involve the buying or selling of Treasury securities from member banks to change the amount of money in the system available for lending. Buying Treasuries from members puts cash into the system—lower interest rates. Selling Treasuries takes cash out of the system—higher interest rates. This is the tool of choice.

There are 12 regional banks in the Federal Reserve System. Each has its own Governor who participates in meetings. Five of these Governors will vote in an Open Market Committee Meeting at any one time. Voting status rotates. There is a 7 member Board of Governors, appointed by the President, and they all vote each time. So 12 votes at each meeting to determine the direction of rates.

There are 8 meetings a year. On Wednesday, at 2 pm EST, their decision is announced. Each member studies data from their region and from the overall economy to come to consensus. They indicate their rate forecast on a Dot Plot, giving business and market participants a heads up about rate direction. Telegraphing their intentions is crucial, as surprises can have far reaching effects.

Members serve for 14 year terms, meaning each will outlast any one Presidential administration. Independence is important and gives all market participants confidence in the system. In 1951, the independence was formalized in the Treasury-Federal Reserve Accord.

Many other countries’ central banks have only one job—price stability—but our central bank, the Federal Reserve, has two jobs. It is the dual mandate. They are charged with keeping prices stable so they pay a lot of attention to inflation measures. When inflation raises its head, they increase rates which slow down the economy. They must also promote full employment and economic growth. When the economy slows down, they lower rates to spur activity. The problem is they can’t do both at the same time.

And that’s why they are having such a difficult time now… inflation is still an issue and may rise further with the filtering through of tariffs but this is also coming at a time of slowing employment. What’s a Fed Governor to do?

So they lowered the target range by 0.25%, and it is a range, not a definite number. But that action will bleed through the economy and have an impact on all kinds of loans—mortgages, car loans, business loans, credit cards, etc. It’s the reason it’s critical that their decisions remain independent of politics and dependent on sound data.

OBBB: What's In It For You?

The following blog was written by Nancy Lottridge Anderson, Ph.D., CFA

Do we register negatives? 

If we DON’T crash the car today, do we consider that a win? If the plane DOESN’T go down, does it make headlines? If your boss does NOT cut your salary, do you call home with the good news?

Most of the time, negatives are not registered in the win column. They can be “whew” moments or near misses, but they don’t really feel like we have moved the ball forward. We just haven’t gone backward.

So, the big win out of the One Big Beautiful Bill is a “negative.” The temporary tax cuts that were enacted in President Trump’s first term were set to expire at the end of the year. The hammer hanging over the Republican Party was the bounce back of old tax rates and the accusation that they had allowed taxes to go UP. But how much will the public notice that this did NOT happen? 

Our tax rates remain the same, and most take home pay won’t change. Expanded standard deductions will also remain in place. For many, this will not show up until they file taxes next year. So, what positive news can we look forward to?

·      Additional bonus deduction for seniors. This is NOT relief from tax on Social Security benefits. In fact, it has nothing to do with SS benefits. It’s all about your age and your income. A bonus deduction of $6000 is allowed per person for those over 65. If you’re younger than 65, you don’t get the bonus relief. Also, about 64% already pay no tax on SS benefits because of the high standard deduction and the formula for including SS benefits. Having a bonus deduction won’t help these recipients. The extra deduction phases out for singles above $75,000 in income and couples making more than $150,000 in income. To top it off, the bonus is temporary and will end in 2028. Cue the hammer for whoever is in charge then.

·      Deduction for tip income. This is only for those occupations that are typically reliant on tips (mostly the hospitality industry), and the IRS is set to release a list of those eligible by October 2^nd. General service charges don’t count. The tip must be reported, and the employer and employee must pay FICA tax on the tip. It’s an “above the line” deduction so it adds to the standard deduction. No itemization is necessary. It is limited to $25,000 and phases out at incomes of $150,000 (single filers) and $300,000 (joint filers). It also sunsets in 2028.

·      Deduction for overtime. This is another “above the line” deduction, making it unnecessary to itemize. For “approved” overtime, filers may deduct $12,500 (single filers) and $25,000 (joint filers). It also sunsets in 2028 and phases out at the same income levels as tips. FICA taxes still apply.

·      SALT deduction. Those living in high property tax areas have been screaming for the last 10 years about the $10,000 limit on this deduction. OBBB increases this deduction to $40,000. Those living in high property tax areas will see relief only if their total itemized deductions (including the higher tax provision) exceed the standard deduction. The higher itemized deduction on property tax phases out in 2029.

·      Car Loan Interest Deduction. This deduction is only for new cars whose final assembly is in the US. Single filers with up to $100,000 of income and joint filers with up to $200,000 of income may deduct up to $10,000 in car loan interest each year. Again, this provision is temporary.

·      Baby bonds/Trump Account. Babies born in the next four years can receive $1000 as a starter savings accounts. Annual contributions of $5000 are allowed, and the accounts grow tax-free until the child hits 18.

Keep in mind that these are all limited to certain income ranges, making planning more complicated, and making the deduction less valuable. However, some of these changes will be a real benefit to some taxpayers.

There may also be some good news for business in the OBBB. CPAs will be combing the new provisions for ways to lower the tax bills of small business owners. Meanwhile, the IRS and the US Treasury will have its hands full putting the bill into action with new forms, new regulations, and new definitions.

When all is said and done, will we see this as a win? For most, the difference will be minimal. Taxes did NOT go up, so “meh?” For a slice of the population, taxes will be lower, but the effect will be deferred until after filing. So, is this a win, or just a big “negative”?

The Looming Student Loan Crisis

 My former colleague, Dr. Mark McComb, a retired business Mississippi College professor, has been warning for years about the looming crisis in student debt. I listened to his statistics and understood the problem, but I expected the unraveling to be slow and quiet. The current administration’s approach to the problem threatens to make this a fiscal cliff for individuals that will bleed over into the entire economy. 

 

Currently, more than 42 million people have student debt. That represents about 13% of the entire US population. The total debt outstanding is approximately $1.8 trillion.

 

How did we get here?

 

In 1965, we passed the Higher Education Act that set up a system of borrowing that encouraged debt for education purposes. As it began, private lenders gave out loans to any and all, knowing that the Federal Government would “make good” on bad loans. Such an arrangement allowed lenders to ignore risk in their lending practices.

 

At the time, the US was in a race with the Soviet Union and wanted to promote higher education for us to compete globally. It worked. More people went to college because they could take out loans to cover the cost. Inadvertently, it may have led to higher tuition as public and private institutions took advantage of the availability of this money.

 

In the 90s, income-based repayment plans were introduced, limiting payments to about 10% of income. In 2007, we passed the Public Service Loan Forgiveness Program. This set up a forgiveness plan for anyone who worked in a public service role for 10 years while continuing to make payments on loans. Later, this was expanded to non-profits. This set the stage for some type of forgiveness for these loans. All these programs recognized the problems in the student loan market and attempted to offer a band aid of relief to borrowers. Discharge of student debt in bankruptcy is extremely rare.

 

In 2010, the US Government took over much of the role of the private lenders. This was tucked into the Affordable Care Act which sought new sources of revenue. The thinking was that the government was on the hook in case of default. Why not make the interest on these loans that were going to private lenders?

 

How did we get to the “fiscal cliff?”

 

In 2020 when COVID hit, a moratorium on student debt payments was instituted. Offering payment relief during work shutdowns was a way to ease economic damage. President Trump extended the moratorium multiple times. President Biden extended it several times, as well. After four years, Biden set a timeline of 12 months for payments to restart. During this time, servicers did not report delinquencies to credit agencies, though, so many did not restart payments. That means that many borrowers have not made payments for nearly 5 years.

 

In the meantime, President Biden tried addressing the problem by offering loan forgiveness for up to $20,000. This was struck down by the Supreme Court. Biden also instituted a new income repayment program called SAVE that would limit payments to 5% of income. The intention was to ease the stress of restarting payments after the moratorium. Eight million borrowers signed up for SAVE. This program has been challenged, and the current Department of Education has taken down information about ALL income-based programs. In effect, the SAVE program is no more.

 

And where do we stand now?

 

About 5 million borrowers are in default. Another 4 million have delayed payments and may also go into default. Servicers are reporting these 9 million people to credit agencies. Credit scores are being hit hard, affecting the ability of these borrowers to get additional loans, open credit card accounts, rent apartments, and maybe even affect employment.

 

Servicers are overwhelmed as payments are restarting. Borrowers are struggling to get help from a hollowed-out Department of Education. One million new applications for income-based plans are being held up due to loss of staffing. Payment calculations are varying widely, and borrowers are in a state of panic.

 

The Trump Administration has announced that “involuntary” payments will begin May 5th. Tax refunds, pensions, Social Security benefits, and even wages may be garnished to cover debt payments. 

 

So, you don’t have a student loan? Why do you care?

 

While this is a serious problem for anyone facing student debt with limited ability to make the payments, it’s also a problem for the economy at large. Consumer spending has already slowed. Family budgets will be hit hard with the loss of discretionary income. That will be less to spend on other things. And those whose credit is affected will find their ability to buy cars, houses, and other items on credit reduced.

 

So, Dr. McComb, I am really paying attention now. The student loan market has been a mess for a while. Currently, this fiscal cliff threatens us all.

For more information, listen to the podcast The Daily or read US News and World Report .