Navigating Tax Laws: Understanding Tax Deferred Savings Accounts

Tax deferred savings accounts are designed to help you save for the future. 

The most common type is the Individual Retirement Account (IRA) which allows you to save pre-tax dollars and invest in various types of investments. When employers provide matching pre-tax dollars, the Individual Retirement Account can grow substantially.  "You postponed taxes on your contributions and earnings; you didn’t eliminate them."  (Source AARP)  Withdrawals from these accounts are taxed as income in the year you make the withdrawal. 

Required Minimum Distribution (RMD)

"You must start taking RMDs by April 1 of the year after you turn 73."  (Source: AARP). This RMD is calculated based on your age and the balance of your IRA at the end of the previous year. 

The RMD amount must be withdrawn and included in your taxable income regardless of whether you need the money. Failure to take the RMD can result in a substantial tax penalty. 

Tax Deferred Savings Accounts that have RMD's include: SEP-IRAs, SIMPLE IRAs, Traditional IRAs, 401(k)s, 403(b)s, 457(b)s, Profit-sharing plans, other similar tax deferred plans.  (Source: Smart Asset)

RMD Calculation

An RMD is calculated by dividing a person’s account balance (as of Dec. 31 of the previous year) by his current life expectancy factor, a figure set by the IRS. For example, a 75-year-old has a life expectancy factor of 22.9. If a 75-year-old retiree has $250,000 in a retirement account, he would be required to withdraw at least $10,917 from his account that year. (Source: Smart Asset)

Most financial institutions will calculate your annual RMD for you.  

A RMD calculator (updated to include SECURE Act of 2019 and CARES Act of 2020) is as follows: Required Minimum Distribution (RMD) Calculator (aarp.org)

Roth Conversion

Retirees may opt to convert tax deferred IRAs to Roth.  Although Roth conversion has important advantages, such as investment growth that is not taxed, there are rules and requirements, and this conversion also has tax implications.  Roth IRA Conversion Rules (investopedia.com)

Impact of RMD's on Your Tax Bracket and IRMAA

Annual Required Minimum Distribution is considered "income" and is included in your Adjusted Gross Income (AGI).  This has potential to place you in a higher tax bracket.  1040 Calculator Estimates Your Federal Taxes (aarp.org)

For high-income Medicare beneficiaries, Part B and Part D premiums include an additional charge based on your modified adjusted gross income, placing you in a higher IRMAA bracket (income-related monthly adjusted amount (IRMAA), a surcharge added to your Part B and Part D premiums).  "The income threshold for Medicare premium surcharges is indexed for inflation each year. In 2023, the threshold is $97,000 for a single individual; in 2024, it’s $103,000 for a single person."  (Source: Medicareresources.org)  2023 Medicare Parts A & B Premiums and Deductibles 2023 Medicare Part D Income-Related Monthly Adjustment Amounts | CMS

Some states also tax your RMD.  

Call to Action: Explore Tax Deferred Savings Accounts With Your Tax Advisor

Decisions regarding your RMD, IRA, Roth Conversion have broad tax implication and may include individual state requirements.  It is essential to consult with your tax advisor. 

Photo: L. McCallister.  McCall, Idaho

RESOURCES THAT MIGHT BE HELPFUL..

Required Minimum Distribution (RMD)

Required Minimum Distribution Calculator (RMD). Avoid stiff penalties for taking out too little from tax-deferred retirement plans.  Required Minimum Distribution (RMD) Calculator (aarp.org)

Understanding your Required Minimum Distribution. What it is, when to take it, and what to do with it.  Scwabb.  P-1624444.pdf (SECURED) (schwab.com)   (Note: An excellent overview of steps and requirements.)

Taxation of required minimum distributions.  Every good thing must come to an end … even tax deferral.  Vanguard.  Taxation of required minimum distributions | Vanguard

84% of Retirees Are Making This RMD Mistake. You Don't Have to Be One of Them. Patrick Villanova, CEPF.  84% of Retirees Are Making This RMD Mistake. You Don't Have to Be One of Them (msn.com)

Roth IRA Conversion Rules

Roth IRA Conversion Rules. Learn the details and decide whether a conversion makes sense for you. Investopedia.  Greg Daugherty.  Roth IRA Conversion Rules (investopedia.com)

Tax Year 2023 Tax Calculator

1040 Tax Calculator. Estimate your taxes with AARP's federal tax calculator.  (Estimate for Tax Year 2023)  AARP.  1040 Calculator Estimates Your Federal Taxes (aarp.org)

IRS announces new tax income brackets for 2023: Here's how much you'll pay.  (for filing in 2024) Erik Bascome, Staten Island Advance, N.Y.  IRS announces new tax income brackets for 2023: Here's how much you'll pay (msn.com)

Medicare - Income-Related Monthly Adjusted Amount (IRMAA)

What is the income-related monthly adjusted amount (IRMAA)?  Medicareresources.org   What is the income-related monthly adjusted amount (IRMAA)? | medicareresources.org

2023 Medicare Parts A & B Premiums and Deductibles 2023 Medicare Part D Income-Related Monthly Adjustment Amounts. CMS.gov  2023 Medicare Parts A & B Premiums and Deductibles 2023 Medicare Part D Income-Related Monthly Adjustment Amounts | CMS


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