Year-End Tax Planning: Navigating RMDs, Roth Conversions & Taxable Withdrawals

On that list of “to-dos” could be income tax planning.

For some clients (aged 73 or older and those with inherited assets), this likely includes IRS mandated taxable withdrawals. For years, the IRS has mandated clients with tax-deferred IRAs, 401k, retirement accounts begin taking a required minimum distribution (RMD) sometime in their 70s. Currently, RMDs begin at age 73 (people born between 1951 and 1959), and continue every year.

For people that inherited IRAs/qualified retirement assets, the rules used remained the same for a long period of time until 2020 came around and rules changed (only for new inheritors; and specifics of the new rules were not clarified). Finally, for people that inherited IRA/retirement assets post-2020, the annual distribution rules were clarified, and we have proper guidance moving forward. If you find yourself in this position, it is best to talk with your RK advisor or CPA to review your specific required distributions.

However, for people whom distributions are not required, the planning “to-do” list may include reviewing whether or not to take money out of qualified tax-deferred assets either via a ROTH conversion or withdrawal for near-term cash needs. Additionally, some people with required distributions may wish to take more than the minimum distribution. Taxes are due on these withdrawals; however, this is where planning is key.

At Rather & Kittrell, we will never pretend to know where tax rates are headed. The only thing we can do is plan for the current year and look at future years with possible scenarios in mind.

With this planning, it may be that taxable withdrawals can be made in a lower tax bracket. We may look at projecting future required distributions and conclude that we can make smaller withdrawals now in lower tax brackets than projected tax brackets in future years. An example of this looks like a couple taking roughly $60,000 of IRA withdrawals that is not required and staying in a low tax bracket for 2024, knowing that in 5 years when RMDs begin the projected RMDs will be much higher than $60,000.

Planning may be a professional who has inherited assets with required distributions for the next 10 years. They know their career trajectory is set to see significant increases in employment income starting in 3-5 years, so they decide to take larger inherited required distributions early on to minimize the required distributions when their employment income increases.

Each situation is uniquely based on requirements, projections, and personal feelings about paying taxes. To provide a blanket “taking extra income to fill up “X” tax bracket” is an over-simplification of a what may be a great plan.

If anything in the above has piqued your interest in a specific tax planning conversation, reach out to your RK advisor. We are happy to help tackle this part of your year-end “to-do” list.

Amanda Howerton, CFP® , CDFA® is a Senior Advisor with Rather & Kittrell.