Ed Slott, known to many as “America’s IRA Expert”, is a frequent speaker, television personality, and best-selling author. Ed’s latest book, The Retirement Savings Time Bomb Ticks Louder, has been a tremendous resource for our team. Ed hits on a number of critical issues in the book but if I could be so bold to summarize, the shortened version is “not all of your retirement account belongs to you”.
For many of you reading this, you worked – or are working – your entire career to build a nest egg large enough to enjoy a comfortable retirement. A large portion of these efforts was likely done via your employer’s retirement plans: 401k, 403b, deferred compensation, etc.
If you elected to invest in these accounts on a pre-tax basis, you received a tax break along the way while saving for retirement.
Skipping taxes on that income as it made its way into your retirement plan did not absolve you from paying taxes on it, however.
It just means Uncle Sam allowed you pay him less while you were working, with the understanding that you would “settle up” with him down the road. For those of you turning 73 or older in 2025, Uncle Sam is ready for you.
Required minimum distributions (RMDs) from pre-tax retirement accounts are a mechanism where retirees must take a growing percentage out of their account balance annually for the remainder of their life. At age 73, that mandatory withdrawal percentage is just short of 4%. By age 90, the withdrawal percentage grows to over 8%.
The required beginning date for RMDs has changed several times in recent years. For a long time, required minimum distributions began at age 70 ½. The SECURE Act, enacted in 2019, pushed the RMD age to 72. In late 2022, Secure Act 2.0 was enacted.
Secure Act 2.0 will gradually push the RMD age out even further, from age 73 today to age 75 by 2033. For readers who have other sources to fund your retirement lifestyle (e.g., non-retirement investment assets, pension, social security, etc.) leaving your pretax accounts alone might seem like the best option at first glance.
The wealth planning work that we do for our clients is showing, more and more frequently, that delaying withdrawals from pre-tax accounts can lead to required distributions that are potentially larger than what is needed to fund their retirement lifestyle. That means paying more in taxes than they need to, as well.
There are a number of strategies that can be used to mitigate this problem, and time is very much your friend.
Another change with Secure Act 2.0 – perhaps even more material – is the change to required minimum distributions for those who inherit a pre-tax retirement account.
Before Secure Act 2.0, most non-spouse beneficiaries (usually children) could stretch the required minimum distributions on those pre-tax accounts over their own life expectancy. Most non-spouse beneficiaries now have just 10 years from the date of the original owner’s death to completely empty the inherited retirement account. Spousal beneficiaries are still allowed to treat the account as their own.
It’s not a huge stretch to say that baby boomers, Gen Xers, and millennials typically had or are having children later in life than their parents. As a result, many people may now be inheriting assets while they are still working and in their peak earning (and effective tax rate) years.
Recent enactment of the One Big Beautiful Bill Act (OBBA) has made the federal estate tax exemption of $15 million per person ($30 million for married couples) permanent. Data from the Institute on Taxation and Economic Policy shows that Federally taxable estates account for less than 0.1% of all estates.
Both changes noted above mean that many beneficiaries may now be primarily subject to federal income taxes rather than federal estate taxes – an expensive change for beneficiaries.
There are ultimately four places your money will go: your own enjoyment, your heirs, charity, or the government. Designing and executing a thoughtful distribution plan can help give you more control over where those funds will flow.
To discuss how you can diffuse your own Retirement Savings Time Bomb, maximize the legacy you hope to leave, or for a copy of Ed Slott’s latest book (20 copies available), please reach out to our team at provenance@rbc.com or call Financial Advisor Josh Rebholz CFP®, CEPA® at 651-430-5502.
Source: irs.gov
Source: itep.org