There are two “Tax Bombs” in retirement, Required Minimum Distributions (RMD) and Income Related Monthly Adjustment Amount (IRMAA).
Required Minimum Distributions
If you are 73 or older and haven't yet withdrawn from your IRA, the IRS requires you to take a mandatory distribution (RMD) by April 1st of the year following your 73rd birthday. You may also take it during the year you turn 73 to avoid needing to take two distributions the next year. Once you reach 73, your mandatory withdrawal must be made annually by December 31st.
The withdrawal amount each year is determined by a calculation that applies a factor to the December 31st value of your IRA, with the factor adjusting as you age. You can either combine all your IRAs, calculate the total RMD, and withdraw from one account, or calculate and withdraw the RMD from each IRA individually on a proportional basis.
It's crucial to remember that IRA withdrawals are taxed as ordinary income, and because the IRA is tax-deferred, you may face an unexpected tax bill when you file your taxes.
Income Related Monthly Adjustment Amount
Once upon a time, everyone paid the same rate for their Medicare Part B and Part D coverage. However, changes were made over time when surcharges were applied to people who had annual income over a certain threshold. Then another change occurred a few years later when 3 additional brackets of surcharges were created based on annual incomes, very similar to how tax brackets work. The higher your income in retirement, the more you pay for coverage. The people in the top bracket are now paying considerably more for their coverage than people in the lowest bracket. The Medicare trust fund is declaring that the current funding for Medicare is drastically underfunded, and more adjustments will be needed in the future to continue to make Medicare available to all.
What should you know and do about this? We recommend that individuals start taking withdrawals from their IRAs before they reach the Required Minimum Distribution (RMD) age. This can help reduce the tax burden at age 73 by spreading your taxable income more evenly throughout retirement, potentially lowering your overall income taxes. Strategies like converting an IRA to a Roth IRA or using IRA withdrawals to pay for long-term care insurance premiums or life insurance for legacy planning (benefiting your family or chosen charities), may be worth considering, especially if further accumulation isn't needed. The key takeaway is to stay informed about your future financial outlook and have a well-thought-out plan in place.
Registered Representatives of Equity Services, Inc. do not offer tax or legal advice. For advice concerning your own situation, please consult with your appropriate professional advisor. www.weyersmckeeverfinancialpartners.com TC6981076(0924)1