Second Quarter Summary of Webinar Take-Aways

 

We are almost halfway through 2026 and it’s time for another quarterly summary of takeaways from webinars, podcasts, and classes that I have recently attended. Below are nine nuggets that stood out to me as I reviewed notes taken in my personal learning journal:

The Importance of Tax Planning- Reasons include 1. Paying taxes at lower rates because the U.S. has a progressive tax system, 2. The tax code is full of traps (e.g., marriage penalty, NIIT, IRMAA, AMT, kiddie tax, widow’s penalty), and 3. Different parts of the tax code need to be coordinated.

 

RMD Withdrawals- Reducing future RMDs can help avoid being forced into a higher tax bracket. For example, make Roth conversions in your 60s if already retired and your income is lower. Some people, however, may not be able to avoid the high tax rates associated with a large RMD.

 

IRMAA- The Income-Related Monthly Adjustment Amount, an extra surcharge added to Medicare Part B and Part D premiums for higher-income beneficiaries, is not a lifetime sentence. Every year there is a reset. Use form SSA-44 to request a smaller premium due to a life event (e.g., widowhood).

 

Investment Risk- There is no such thing as a “free lunch” in life or investing. In addition, there is no perfect investment (high return, risk-free, and tax-free). Volatility (how much the price of an investment rises and falls over time) is the “cost of admission” for investing.

 

OBBBA Tax Law- There is confusion regarding “no tax on Social Security” and the new senior tax deduction. Social Security IS still taxed and the senior tax deduction is age-based (65+) and income-based (phase-outs apply) and has nothing to do with receiving Social Security. New child savings accounts roll out in July with $1,000 of government seed money for children born from 2025-2028.

 

Financial Education Impact- The best time for financial literacy classes is 11^th grade. Students are interested in financial topics by then but don’t have distracting “senioritis.” Financial education allows students to mess up in a “fake world” (e.g., case studies) to avoid mistakes in the real world.

 

Limiting Beliefs- Far too many people quit far too soon, instead of persisting, due to self-limiting beliefs. They tell themselves they are not capable and don’t even try. The #1 determinant of whether people reach their goals is whether they quit. Break big goals into small achievable steps.

 

Retirement Risks- Key risks facing older adults are running out of money in retirement, the effects of inflation, market volatility and sequence of returns risk (retiring into a down market), longevity risk (living longer than you think), increasing health care expenses, and the cost of long-term care.

 

Late Retirement Savers- The biggest “catch-up” lever for late starters is their savings rate. It takes about 10 to 15 years of aggressive saving to catch up (to typical 40-year savers) after a late starter “wakes up.” The average age of starting to save for retirement is 32. Late start savers and FIRE (financial independence, retire early) proponents have a similar savings timeline.

This post provides general personal finance or consumer decision-making information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.

 

Take-Aways from a Retirement 101 Webinar

I recently attended a Retirement 101 webinar sponsored by the New York Public Library called Retirement Planning 101: Strategies to Maximize Your Life in Retirement. The webinar included content about retirement planning, investments, building wealth, retirement income streams (e.g., Social Security, pension, investment withdrawals), health care costs, and long-term care.

Below are eight of my key take-aways:

Meanings of Retirement- Everyone has their own personal definition but some common themes related to a “good retirement” are financial freedom (not relying on employment income), lifestyle choices (freedom to do what you want), security and independence (adequate resources to handle life events), and legacy (opportunity to leave behind support for heirs and charities).

Benefits of Early Saving- Compound interest and time are your greatest allies. Starting even a small retirement account in your 20s or 30s dramatically increases your savings nest egg and  reduces the amount needed to save in later life. An investment of $250 per month earning a 7% annual return starting at ages 25 and 35 would be worth $656,000 and $304,000, respectively.

Overcoming Barriers- Some people say, “I don’t earn enough to save.” The solution is to start small. Even modest savings can grow significantly over time. Other people say, “I have to pay off debt first.” The solution is to balance debt repayment with retirement savings, especially if an employer matches retirement plan contributions.

Investment Vehicles- There are several places where people can save for retirement including employer-sponsored plans (e.g., 401(k), 403(b), TSP), individual retirement accounts (IRAs), and personal investment (i.e., brokerage) accounts. Advantages include potential employer matches (employer accounts), tax benefits, and long-term growth.

Reinvested Investment Earnings- When you reinvest dividends and capital gains earned on investments (e.g., stock mutual funds), you generate returns on those returns via compounding. Over time, compounding can significantly boost the overall return on an investor’s portfolio.

Retirement Income Sources- Defined benefit plans (pensions), which are less common than decades ago, pay a specific monthly benefit for life determined by a formula based on salary and years of service. Defined contribution plans (e.g., 401(k)s) allow workers to voluntarily contribute a set percentage of income to a personal retirement savings account that must be managed when they retire. Some workers convert their accumulated balance into an annuity at retirement.

Investment Withdrawal Methods- Common methods to withdraw retirement savings to avoid running out of money include the 4% Rule, a bucket strategy (assets segmented into “buckets” (groups) for short-term, mid-term, and long-term goals), and using required minimum distributions (RMDs) as a withdrawal strategy after age 73 or 75 (depending on year of birth).

Long-Term Care (LTC) Planning- LTC is the need for help with activities of daily living (e.g., eating, bathing, and dressing). Costs vary by state and level of care (e.g., assisted living, nursing home). Options to cover LTC expenses include LTC insurance, hybrid LTC insurance (life insurance with a LTC rider), self-funding, and Medicaid, if applicable.

This post provides general personal finance or consumer decision-making information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.

 

IRA Insights: Take-Aways From a Recent Webinar

 I recently attended a webinar about individual retirement accounts (IRAs) and income taxes that was sponsored by the Financial Planning Association (FPA). The speaker was Ed Slott, a leading national authority on IRAs who is widely quoted in financial publications for professionals and consumers. Ed and two of his staffers answered dozens of questions live and via the online chat.

Below are six key take-aways:

Tax Season Never Ends- Most people think they are done with taxes on April 15. That may be true for tax return preparation, but not for tax planning. Tax planning is an ongoing process throughout a taxpayer’s lifetime and beyond (i.e., tax-deferred accounts inherited by beneficiaries).

Many People Have a “Tax Problem”- There is more than $40 trillion invested in tax-deferred retirement savings accounts. Once account owners reach age 73, they must start taking required minimum distributions (RMDs). These withdrawals are taxed as ordinary income, which can push them into a higher marginal tax bracket.

The 10-Year Rule- This rule applies to most non-eligible designated beneficiaries (e.g., adult children, grandchildren, and non-spouse individuals) who inherit a tax-deferred retirement account, such as a traditional IRA or 401(k), when the original account owner passed away after 2019. This rule took effect as a result of the SECURE Act. The entire inherited account must be fully distributed by December 31 of the 10th year following the year of the original owner’s death.

The “At Least As Rapidly” Rule- This is an additional guideline for inherited tax-deferred accounts that applies when account owners of a tax-deferred retirement account, such as a traditional IRA, pass away after beginning their RMDs. If the original account owner had already started RMDs before passing, the beneficiary must continue withdrawing RMDs each year during the 10-year period, thereby making withdrawals at least as rapidly as the original owner was required to.

No Extension on the 10-Year Rule- There was a five-year delay in IRS clarification about exactly how withdrawals under the 10-Year Rule must be taken by non-eligible designated beneficiaries. This did not, however, extend the ten-year window to deplete an inherited account. For example, if an account owner died in 2022, the ten-year period is 2023 to 2032, and the account must be fully withdrawn by December 31, 2032. RMD penalties for non-spouse beneficiaries are now in effect. The penalty is 25% of the amount that should have been withdrawn but was not.

Tax Laws Are Transitory- Mr. Slott noted that tax laws “are always written in pencil” and are subject to change. A big unknown right now is the future of the Tax Cuts and Jobs Act (TCJA), which is set to expire at year-end. If the TCJA is left to expire, marginal tax rates will revert to higher rates that were in effect in 2017. Slott advised the audience to “always pay taxes when rates are the lowest” and to take a long view and consider, not only current year taxes, but taxes in the future.

This post provides general personal finance or consumer decision-making information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.

Takeaways From a Conference About Retirement Savings

I recently attended (virtually) a conference about retirement savings sponsored by the Employee Benefit Research Institute (EBRI). Below are some of my key take-aways:

Funded Contentment- I ever heard that phrase before. It means a person’s ability to underwrite a happy and meaningful life. The focus is on having enough money instead of reaching a specific number (i.e., dollar amount of retirement savings). Instead of a “greed is good and more is better” mentality, many retirees want to focus on meaning and purpose in later life.

Narrative Species- One speaker noted that humans are not a “numeracy species” focused on math and numbers but, rather, a narrative species. In other words, people learn best about personal finance (and other topics) through stories and case study examples.

Automatic Non-Decisions- An easy way for people to save money for retirement is to “turn decisions into non-decisions.” In other words, take action once to automate financial transactions such as payroll deductions for a 401(k) or regular automatic deposits to buy stock or mutual funds.

The Impact of Vividness- When people’s “future self” is made vivid through aging apps and other tools, they are more likely to make decisions and sacrifices today to have a better future in later life. For example, they might save and invest more money and eat more healthy food.

RMDs as an Income Withdrawal Strategy- Findings from a study of the effects of increasing required minimum distribution (RMD) age from 70.5 to 72 to 73 were reported using data from a sample of over 3 million IRA owners. The study found that not a lot of people take RMDs until they are required to do so. As the RMD age got pushed back, so did the frequency of people taking later distributions. In other words, changes in RMD age as a result of the two SECURE acts affected investor behavior because many retirees use RMD rules as a default income withdrawal strategy.

Retiree Financial Challenges- Retirees with significant sums in tax-deferred accounts are facing challenges from RMDs, which can trigger tax on Social Security, higher income taxes in general, and higher Medicare premiums call IRMAA. Even still, people have an aversion to withdrawing money from tax-deferred accounts earlier than RMD age.

The Impact of Guaranteed Income- Older adults with guaranteed lifetime income (e.g., pension or annuity) are more likely to spend money and less likely to feel financial stress than those who withdraw money from investments to pay living expenses. The latter group is subject to longevity risk (risk of outliving savings) and sequence of returns risk (risk of withdrawing funds during a market downturn) and tend to hold back on spending. The #1 fear of retirees is running out of money.

Cultural Norms- In some cultures, family members serve as a de facto “emergency fund” for each other. This expectation can hinder the financial progress of those who save. Some people may want to have a place for their money that relatives don’t know about because it is hard to say no to family members. 

This post provides general personal finance or consumer decision-making information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.

Highlights of Recent Webinars: First Quarter 2024

 

Every quarter, I like to review and summarize my notes from webinars I attended during the last three months. Below are some interesting tidbits from recent programs that I attended:

Future Self Thinking- Many people often think of their “future self” (who they will be decades in the future) as a stranger. As a result, they don’t think about the consequences of doing something now because their actions are affecting another person rather than themselves personally.

 

Required Minimum Distributions (RMDs)- Only IRAs and 403(b) plans (for school and non-profit sector employees) can be aggregated to calculate RMDs. All other tax-deferred plans, like 401(k)s and the thrift savings plan (TSP), must have RMDs calculated separately.

 

Saving Money on College Expenses- Suggested strategies include going to community college first, living at home with parents, going to a public college in your home state, applying for scholarships, buying used textbooks or renting textbooks, and getting a job at a college.

 

“Loud Budgeting”- This is where people (mostly young adults) post videos, primarily on TikTok, about ways they are reducing expenses and saving money. In many cases, they are repackaging “tried and true” strategies from the past but are doing so to appeal to a new generation.

 

ChatGPT- This program, developed by Open AI, is the most popular large learning model (LLM). It is trained on a massive data set of text, pulls information from multiple sources, and consolidates it to create brand new content in response to prompts by users.

 

Financial Trauma- The textbook definition is any negative experience that affects how people handle money (e.g., saving and credit). The trauma can be “little t” (relatively minor) or “Big T” (a major event). Financial advisors should always remember that people are the expert of their life.

 

Roth Conversions- It is best to move money from a pre-tax account to a Roth account in low-taxable income years, during stock market downturns, and/or in small increments over time. When you do a Roth conversion, you are front-loading taxes to avoid taxes at higher rates later.

 

A Dollar Too Much- RMDs often push older taxpayers into a higher marginal tax bracket. Just one extra dollar in income can trigger tax on Social Security benefits, higher Medicare premiums, and the 3.8% net investment income tax.

 

IRMAA Medicare Surcharge- The income-related monthly adjustment amount (IRMAA) is an extra amount that high-earning retirees pay for Medicare coverage. Currently about 7% of retirees pay IRMAA and there are five IRMAA income thresholds beyond the standard Medicare premium. IRMAA is based on income earned two years earlier (e.g., 2022 for 2024) and can be avoided by lowering adjusted gross income or making an appeal to Medicare based on life events.

This post provides general personal finance or consumer decision-making information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.

 

Year-End Tax Moves to Save Money

 As the year winds down so, too, does your opportunity to take proactive steps to reduce 2023 income tax due in April 2024 and, perhaps, taxes due in future years as well.  Below are some money-saving tax planning strategies to consider. Seek professional advice as needed.

Early RMD Withdrawals- The “financial gap years” between age 59½ and 73 (or 75 if born in 1960 or later) are when there are no longer penalties for withdrawals from tax-deferred accounts but required minimum distributions are not yet mandatory. Sometimes it makes sense to pay taxes voluntarily at a lower tax rate during gap years to save on taxes later at a higher tax rate.

 

Draft Tax Return- A draft tax return with “best estimates” of taxable income and tax write-offs is the first step in a year-end tax review. By early December 2023, income and tax withholding should be pretty predictable and tax-saving strategies taken so far (e.g., tax-deferred retirement plan contributions and charitable gifting) are already accounted for.

 

Year-to-Year Comparison- Once a draft 2023 tax return is prepared, compare it to 2022. Look for big changes in income and expenses that will affect taxes owed. Example: savers earned about 0.25% interest in 2022 vs. 4.5%+ with online banks and money market funds in 2023. On large account balances, this could result in a big difference of thousands of dollars of additional taxable income (e.g., $250,000 x .0025 = $625 versus $250,000 x .045 = $11,250).

 

Tax-Loss Harvesting- This is where investors proactively take a loss on the sale of securities to offset realized capital gains. If losses exceed gains, up to $3,000 can be claimed against other taxable income and any losses beyond that carried forward to future tax years. Securities held for a year and a day or longer are taxed at long-term capital gains rates (versus ordinary income rates for short-term gains) so it is important to review their holding period before selling.

 

Tax Bracket Planning- The objective is to control your marginal tax bracket to avoid paying taxes at a higher rate. For example, if you are near the top of the income range for the 12% tax bracket, you want to try to avoid slipping into the 22% tax bracket, which is a big jump. Knowing where you stand can inform tax-reducing strategies such as Roth IRA conversions, deferring income from 2023 to 2024, increasing retirement plan contributions, and “bunching” itemized deductions such as charitable contributions and property taxes due in early 2024.

 

Fourth Quarter Estimate- The last opportunity to apply tax payments toward expected 2023 tax liability and avoid an under-withholding penalty is a fourth quarter estimated tax payment due January 16, 2024. By early January, all information for a tax return should be known, including mutual fund dividend/capital gain distributions that are passed through to investors.

 

For additional year-end tax-saving strategies, consult with a tax advisor or financial planner and/or review this publication from Intuit.

This post provides general personal finance or consumer decision-making information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.

Maximizing Your “Financial Gap Years”

 When someone uses the phrase “gap year,” we often think immediately of young adults who plan experiential learning activities (e.g., traveling, volunteering, and working) between high school and post-secondary education or college graduation and graduate school. In other words, something that young adults do in their late teens and 20s. Think Malia Obama and Elon Musk.

 

There are also gap years for older adults: the time between age 59.5 (when there are no more early withdrawal penalties on money removed from tax-deferred accounts) and the start of required minimum distributions (RMDs). RMDs must now begin at age 73 (those born from 1951 to 1959) and, starting in 2033, age 75 (those born in 1960 and later).

 

Many people are in a lower marginal tax bracket during their gap years (especially after leaving a primary career) than they will be later when RMD withdrawals must begin. If so, gap years provide an opportunity for proactive tax planning.

 

The key is for older adults to focus on things that they can control during their financial gap years. Full disclosure: I am currently in my financial gap years myself and taking several proactive tax planning steps. 

Below are six "gap planning" strategies that can work for some older adults:

 

Partial Roth Conversions- This involves gradually converting the balance in a traditional IRA to a Roth IRA over a series of years while you are in a lower marginal tax bracket. By doing so, you pay a small amount of additional tax in each gap year so the overall tax impact is less.

 

Social Security Delay- If possible (read: there are other available income sources), delaying Social Security up until age 70 (when delayed retirement credits end), not only results in larger future benefits, but it reduces taxable income during gap years to do Roth conversions or realize capital gains on taxable accounts before RMDs begin.

 

Pension Payment Sequencing- Taxpayers fortunate to have a pension may want to delay their work exit date/pension start date to do Roth conversions or realize capital gains on taxable accounts before RMDs begin. Individuals must “do the math” to see if this strategy will work.

 

Taxable Income Planning- Other income sources, besides Roth conversions and Social Security, must also be carefully managed during gap years so as not to “pile on” taxable income. Examples include limiting earned income from a job or self-employment to a certain dollar amount and using tax-loss harvesting to offset realized capital gains on investments.

 

Charitable Gifting- Financial gap years are a great time to take advantage of strategies that not only help a valued non-profit, but also provide income tax write-offs. Examples include charitable trusts, donor advised funds, and qualified charitable distributions after age 70.5.

 

Postpone Expenses- All of the above strategies involve reducing taxable income. Another way that some people proactively plan is to postpone deductible expenses until RMDs begin as a way to offset higher taxable income. Examples include an older landlord delaying rental property improvements until after RMD age and delayed itemized deduction bunching.

This post provides general personal finance or consumer decision-making information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.

 

Tax-Deferred Retirement Savings Plans in Later Life

One place where there is a gap in adult financial education is programs for older adults age 65+. The bulk of community and workplace programs cover financial tasks and decisions to get “to retirement,” not “through retirement." 

One of the niche audiences for my business, Money Talk, is older adults grappling with financial issues such as creation of a retirement “paycheck,” paying taxes on required minimum distributions (RMDs), and simplifying financial accounts.

 

Below are key points from a recent class that I taught about tax-deferred retirement savings plans:

Tax Diversification- There are three types of investments: 1. Taxable accounts outside of retirement savings plans, 2. Tax-free accounts (e.g., Roth IRAs and municipal bonds), and 3. Tax-deferred accounts (e.g., Traditional IRAs and employer plans). Ideally, investors should have investments in all three categories for greater control over their taxable income.

 

Types of Tax-Deferred Accounts- These include employer-sponsored defined contribution plans (e.g., 401(k), 403(b), 457, thrift savings plan), Traditional IRAs funded with pre-tax dollars, simplified employee pensions (SEPs) for self-employed workers, and annuities.

 

Account Beneficiaries- It is unlikely that long-time savers with large balances will die without leaving some money in one or more tax-deferred retirement plans. It is wise to periodically review named beneficiaries and prepare a master list for periodic review and/or revision. Beneficiary types include a spouse, non-spouse (e.g., child), and qualified charity (if allowed).

 

Account Consolidation- Benefits include fewer account management fees, less maintenance (e.g., account logins, tax statements, e-mails, and investment decisions), and greater ease in calculating and withdrawing RMDs and administering a deceased person’s estate.

 

Direct Rollovers- Custodian A should send account proceeds directly to Custodian B. Indirect rollovers (where an account holder is sent the money) should be avoided because there is a strict 60-day time limit to reinvest the money in a new account and withholding taxes usually apply.

 

Rebalancing and RMDs- When RMD withdrawals are made, account owners may have to rebalance the asset allocation of their portfolio. In bull (rising) markets, consider selling assets (for a withdrawal) that have appreciated more than others to get back to target percentages.

 

RMD Calculation- A new life expectancy table took effect in 2022. Simply divide the balance in a tax-deferred account on December 31 of the prior year by the divisor in the table that matches your age. For example, $100,000 ÷ 26.5 (the divisor for age 73) = $3,774 (rounded). As retirees get older, the RMD percentage of their account balance gradually increases.

 

Account Withdrawal Timing- Account owners can make penalty-free withdrawals from tax-deferred accounts after age 59.5. Those with large balances and those who need money for living expenses may benefit from withdrawals before their RMD start date. Withdrawn money can be used for living expenses, savings in a taxable account, charitable or family gifts, and fun.

 

This post provides general personal finance or consumer decision-making information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.

 

 

Barbservations from Three Retirement-Focused Webinars

I recently attended three webinars related to retirement planning. One discussed required minimum distribution (RMD) rules, the second, retirement planning in general, and the third, the FIRE (Financial Independence, Retire Early) movement.

Below are eight key take-aways from these programs:

Simple RMD Description- The IRS wants their cut of your retirement savings that they have been waiting to take for decades. The amount that older taxpayers must withdraw is called a required minimum distribution (RMD) and it is 100% taxable as ordinary income. If taxpayers are near the top of a marginal tax bracket, RMDs can move them up to a higher tax bracket.

Use of RMD Withdrawals- A chunk will pay income taxes. Many people use their effective tax rate as a guide to determine how much to set aside and ask their retirement account custodian to withhold taxes or send the IRS estimated payments. After that, the government does not care what taxpayers do with RMDs. They can spend, gift, or resave this money.

Secure 2.0 Legislation- As a result of this December 2022 law, designed to boost retirement savings by American workers, benefits experts are predicting more qualified employer plans and more plan participants…eventually. Time will tell if workers save more money and have more income in retirement. Unfortunately, many Americans simply don’t have money to save.

Multiple RMD Ages- People with tax-deferred retirement savings accounts born in 1950 or earlier have a RMD of 72 (or 70½ for those who turned 70½ prior to 2020). Those born in 1951-1959 and 1960 and later must begin RMDs at age 73 and 75, respectively. This is a moot point for many older adults as over 80% of account holders withdraw money before RMD age.

IRMAA Surprises- Many older baby boomers who are exiting the workforce in peak earning years are meeting IRMAA (income related monthly adjustment amount) for the first time and are shocked because it is based on income earned two years ago and it feels punitive. IRMAA is a Medicare Part B and Part D premium surcharge for higher earners and there are 5 tiers. Managing income tax and IRMAA income brackets is a key challenge for these taxpayers.

The Future of Social Security- Depletion of the Social Security reserve (a.k.a., trust fund) is projected to take place sometime in the 2030s decade, but this has been anticipated for years based on demographic trends. Depletion of the reserve is not the same as Social Security “going bankrupt,” as many people falsely believe. Benefits may be cut, but they will not go away.

Permission to Spend- Financial planners often encounter long-time “super-saver” clients who have accumulated $1 million+ and have difficulty spending down their accumulated savings. A key question to ask is “What is the purpose of your wealth?” Discussing this question can help give people “permission” to spend their savings.

FIRE Number Formula- FIRE proponents aggressively save young adulthood to afford to leave 9 to 5 jobs in their 40s or earlier. They set a “walking away number” (savings goal) and save as much as possible by maximizing income and reducing expenses. Various FIRE calculators are available to “do the math.” Another FIRE goal-setting technique is saving 25x desired annual income (e.g., $55,000 x 25 = $1,375,000). Obviously, not everyone can do this.

I watch about a dozen personal finance webinars each month. More “Barbservations” to follow.

This post provides general personal finance or consumer decision-making information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.

 

 

Barbservations From Online RMD Webinars

After I left New Jersey and was no longer a recognizable figure as a financial educator for Rutgers University, I attended a few free meal seminars “undercover” in my new home state of Florida. Few people here know about my financial education work and I knew I wouldn't  be "outed" and asked to leave because I'm a CFP(R). 

Knowing that these seminars have been linked to an increased risk of abusive sales practices, if not outright investment fraud, and having read a detailed expose’ by Helaine Olen in the book Pound Foolish, I was curious to see the sales techniques used by the program organizers up close and personal.

Last year, I noticed a new trend that has continued into 2023: ads on social media about online financial seminars focused on required minimum distributions (RMDs) and income taxes owed in later life. In other words, no free meal; just the seminar…and the sales pitch. Curious as I was before, I attended 4 or 5 of these online seminars. Below are some of my “Barbservations”:

Canned Presentation- After viewing several webinars, I noticed that the event organizers were using the same slides and reading the same script, along with personal tweaks, of course. There must be a “central source” that provides program materials to event organizers. Unfortunately, some webinars that I viewed were not updated with latest (2022) IRS life expectancy factors.

 

Pesky Pop-Ups- Throughout all of the presentations, there were pop-up boxes on the screen encouraging viewers to sign up for a free consultation. This was very similar to postcards or door prize entry forms passed around at in-person seminars. In both situations, completing the forms was optional.

 

Scary Tactics- The webinars began with an image of a “tax train” about to run people over and the specter of the highest marginal tax bracket once again being 91% as it once was in the past (1951-1963). The colorful term “tax torpedo,” conjuring up a large explosion, was used to describe how a small income increment can result in a big increase in income taxes.

 

More Scary Tactics- A few that I noted were: “One or two bad years and your money is gone,” “massive amounts of government debt will cripple us,” “Uncle Sam is money hungry,” “taxes have no place to go but up,” and references to “Biden’s taxes,” to stir up some angry political undertones. Some presenters, no doubt prompted by a written script, also ripped up a sheet of paper several times to graphically illustrate the loss of $1million in savings due to taxes.

 

Teaser Tools- Some presenters offered free resources- but only to webinar viewers who made appointments for a consultation. These included an e-book, and something called “safe money tools.” One speaker also disparaged so-called “steak dinner guys” while acting just like them.

 

Kernels of Truth- Wrapped up in the colorful language and scare tactics was accurate core information: 1. Tax diversification throughout one’s working years can reduce taxes in later life, 2. Roth conversions and charitable gift planning (e.g., Qualified Charitable Distributions or QCDs) are strategies to reduce taxes, 3. RMD divisors grow by almost a factor of 1 every year, 4. Setting up automatic withdrawals with plan custodians can help avoid missed RMDs and tax penalties, and 5. Interest and/or dividends from investments should, ideally, satisfy RMDs, at least initially, with no impact on invested principal.

 

Bottom line: Be as cautious when attending online seminars as those that include free meals.

This post provides general personal finance or consumer decision-making information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.

RMDs: The Mandatory “Flipped Switch”

In my book, Flipping a Switch, I refer to required minimum distributions (RMDs) as “the mandatory flipped switch” (i.e., transition). This is because, unlike many other decisions in later life that involve choices, there is no choice about RMDs. They must begin starting at age 72, unless taxpayers want to pay a hefty 50% tax penalty.

 

In conversations with older adults at classes that I teach, many tell me that RMDs are affecting their income taxes in a big way. 

They never expected to accumulate the wealth that they did and, instead of being in a lower tax bracket in later life, as they were told they would be, they have a higher taxable income and/or tax bracket than when they were working.

As we approach December 31, RMDs are on the radar screen for many older adults. Below are 11 essential “need to knows” about RMDs and related tax planning decisions whether you are taking RMDs now or will soon be in the future:

 

Key Deadline Dates- Two key deadlines for RMDs are December 31 for routine annual RMD withdrawals at age 72+ and April 1 for legally postponed RMD withdrawals (i.e., the required beginning date for a taxpayer’s first RMD and the “still working exception” for a current employer’s retirement savings plan).

 

Key Ages- Taxpayers can make withdrawals from tax-deferred accounts without a 10% penalty starting at age 59½ and must begin RMD withdrawals starting at age 72. Withdrawals made at any age are taxed as ordinary income.

 

Calculation of RMDs- RMDs are based on a taxpayer’s current age divisor and their account balance on December 31 of the previous year. For example, the divisor for age 72 is 27.4. Someone age 72 with a $100,000 account would need to withdraw $3,650 ($100,000 ÷ 27.4, rounded).

 

Timing of Withdrawals- RMDs can be taken as one withdrawal or a series of withdrawals during the course of a year. Some people arrange automatic monthly payments through their retirement plan custodian to simulate a “paycheck” while others take their RMD quarterly or in one lump sum. It is a good idea to consider investment performance and portfolio rebalancing needs when taking RMDs.

 

New RMD Table- A new Uniform Lifetime Table took effect for RMDs beginning in 2022. Compared to the table that was used previously, the age-based divisors are slightly higher and the RMD withdrawal amounts are slightly smaller. Of course, people can always withdraw more than the minimum amount it they are willing to pay higher taxes. There is also a separate life expectancy table for couples where a spouse is more than ten years younger than the account owner.

 

RMD Percentages- The updated RMD table has life expectancy-based divisors for age 72 to age 120. As a taxpayer’s age increases, the percentage of their account balance that must be withdrawn increases. At age 72, RMDs (divisor of 27.4 ) are 3.65% of an account balance. At ages 80, 90, and 100, the percentages are 4.96%, 8.20%, and 15.63%, respectively.

 

Tax Penalty- The penalty tax for missing or incorrect RMD withdrawals is one of the largest tax penalties in the tax code: 50% of the amount that was supposed to have been withdrawn but was not. For example, if someone was supposed to withdraw $10,000 and only withdrew $5,000, the penalty excise tax would be $2,500 (50% of the missing $5,000).

 

Tax Leniency- The IRS can waive penalties for RMD shortfalls due to “reasonable error.” Taxpayers must withdraw the RMD that should have been taken and file Form 5329 with an attached letter to explain the situation.

 

First RMD- Taxpayers can take their first RMD by April 1 of the year following the year they turn 72. However, if they do this, they will have two distributions the following year for the current tax year and previous tax year. Factors to consider when making this decision are health status, financial need, and income and tax bracket in both tax years.

 

Combining Accounts- Taxpayers can total multiple traditional IRA account balances, including rollover IRAs, and take a distribution for all IRAs from only one account or any combination of accounts. People will often do this for portfolio rebalancing reasons. RMDs for IRAs cannot be combined with other types of accounts (e.g., 401(k)s and 403(b)s), however, nor can RMDs for personal IRAs and inherited IRAs be combined.

 

RMD Withdrawal Uses- Once they make withdrawals, taxpayers can do whatever they want with RMD money. Common uses are income tax estimated payments, living expenses, fun entertainment expenses (e.g., travel), charitable gifting, and re-saving the money in a taxable account or a Roth IRA if they have earned income (salary/wages and/or self-employment earnings) and are under the maximum income limits.

 

This post provides general personal finance or consumer decision-making information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.

 

An Introduction to IRMAA

Full disclosure: this blog post is written from a place of privilege for older adults with higher-than-average incomes and/or assets. Many are middle income taxpayers who diligently saved and invested for 4-5 decades in tax-advantaged plans. Yes, I am one of approximately 7% of Medicare participants who pay income-related monthly adjustment amounts, a.k.a., IRMAA surcharges.

 

If your first thought when you hear the word “Irma” is a kindly older relative (the name was popular generations ago) or a powerful category 5 hurricane in 2017, this post will bring you up to speed about the “other IRMAA.” As I wrote in my book Flipping a Switch, some older adults must “plan for higher taxes in the future, especially when required minimum distributions (RMDs) kick in.” The key is to enact strategies to reduce your modified adjusted gross income (MAGI).

 

Three IRMAA “Need to Knows”

 

¨    IRMAA is Progressive- Like income taxes, IRMAA surcharges are progressive and rise with income. The rationale for both payments is that people who earn more can afford to pay more for taxes and health care. There is a two-year look-back period so 2022 IRMAA surcharges are based on 2020 modified adjusted gross income (MAGI). There are five MAGI income ranges for IRMAA, with 2022 payments ranging from $238.10 to $573.30 for Medicare Part B and $12.40 to $77.90 for Part D. The 2022 standard Medicare Part B premium for most older adults, for whom IRMAA is a non-issue, is $171.10.

 

¨    IRMAA Can Change- Medicare recipients’ MAGI from two years prior is reviewed annually and IRMAA surcharges are set accordingly. A letter from the Social Security Administration (SSA) notifies beneficiaries of their expected benefit, including IRMAA deductions, if any. Many events can affect IRMA including marriage, divorce, death of a spouse, taxable pensions, leaving the workforce, capital gains on the sale of assets, and the start of RMDs. For example, the surviving spouse of a couple that escaped IRMAA may pay this surcharge as an individual taxpayer.

 

¨    IRMAA Can Be Appealed- Older adults who have experienced a significant drop in income from the look-back year (e.g., 2020) to the year that they are paying IRMAA (e.g., 2022) can file an appeal to show that they had a reduction in income due to eight specific life events: marriage, divorce/annulment, death of spouse, work stoppage, work reduction, loss of income-producing property, loss of pension income, and an employer settlement payment. IRMAA appeals are filed using Form SSA-44 and mailing supporting documentation or showing it to SSA office staff.

 

Three IRMAA Action Steps

 

¨    Reduce MAGI- MAGI is based on adjusted gross income (AGI) plus tax-exempt interest income and certain deductions that are added back. It is the gateway, not only for IRMAA, but Roth IRA contributions. Strategies to reduce MAGI include: projecting “high income” years for advance planning, avoiding transactions that trigger large capital gains, making Roth IRA conversions in lower income years, tax diversification (having a combination of taxable, tax-free, and tax-deferred accounts vs. only pre-tax accounts), and charitable contributions (see below).

 

¨    Plan Proactively- Just $1 of MAGI over income thresholds for the five levels of IRMAA can cost hundreds or thousands of dollars in surcharges. The key is to monitor AGI/MAGI and use legal strategies to lower it. Example: I increased my 2021 SEP contribution to reduce AGI and avoid triggering a higher level of IRMAA in 2023.

 

¨    Consider Philanthropy- As a win-win, older adults can make gifts to charitable organizations that reduce their account balances and taxes. Those age 70 ½ can make a qualified charitable distribution (QCD) from their traditional IRA directly to a qualified charity. The QCD counts as a RMD and isn’t included in income that affects IRMAA.

 

In Summary

 

Two final words about IRMAA: anger and gratitude. When taxpayers get caught off-guard by IRMAA, as many do, it is easy to get angry at the government. IRMAA seems very punitive. This is especially true when you “did everything right” and saved money in IRAs, 401(k)s and the like, as financial experts recommended. I am one of those financial educators and “walked my talk.” Also, IRMAA did not start until 2003 when many baby boomers were well into a savings program.

 

I prefer to focus, however, on gratitude: for the savings I was (and am) able to accumulate and four decades of compound interest that made it grow. Couples who pay IRMAA in 2022 earn over $182,000, making IRMAA a small percentage of their income. 

This does not mean, however, that older adults should just sit back and pay whatever surcharges come their way. On the contrary. You can be grateful and strategic. Consider the proactive strategies to reduce MAGI listed above.

This post provides general personal finance or consumer decision-making information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.