By Cassandra Colon, Client Service Manager
It’s hard to believe we should start thinking about the end of the year in mid-September, but a little planning now makes a big difference later. As the end-of-year calendar fills with holidays, travel and family events, it is easy to let financial deadlines sneak up. One of the most important deadlines for many clients is the Required Minimum Distribution (RMD).
An RMD is a mandatory withdrawal from certain retirement accounts, including traditional IRAs and 401(k) plans rolled into IRAs, once you reach age 73.1 These accounts were funded with pre-tax dollars, which means withdrawals are subject to income tax when taken. Even if you have other resources and do not need these funds for living expenses, the IRS requires annual distributions so taxes are paid. Each year, custodians calculate the required distribution amount using your account balance and age. Exencial works alongside clients to confirm those amounts and determine the most effective way to meet the requirement.
The most common challenge we see boils down to timing and deadlines. Most RMDs must be withdrawn by December 31 each year,1 but for individuals taking their first RMD, the deadline can be delayed until April 1 of the year after turning 73.1 After that, all distributions must be completed by December 31 each year. By that point in the year, custodians are handling a high volume of requests and clients are busy with holiday planning, which can create unnecessary pressure. Many clients find it helpful to think about these requirements earlier in the year.
How you execute on these distributions is flexible, and your Exencial advisor can help explain the routes possible. For instance, some clients deposit RDMs directly for spending, others use them to make charitable gifts and some choose to pass funds along to children or grandchildren.
For those inclined toward giving, Qualified Charitable Distributions (QCDs) allow you to direct your RMD to a nonprofit while reducing your taxable income.2 QCDs are available starting at age 70½, so individuals do not need to wait until age 73 to use this strategy. For clients not yet subject to RMDs, donor-advised charitable accounts3 could be considered. You can donate appreciated assets, take the tax deduction now, and decide later how to distribute the funds to causes you care about.
It is also worth noting that RMD rules for inherited Individual Retirement Accounts (IRAs) have changed in recent years.4 Clients who have more recently inherited IRA assets should connect with their Exencial advisor to confirm the most appropriate distribution strategy for their situation.
Whatever approach you choose, considering your RMDs earlier in the year can help avoid the year-end crunch. Some clients set personal deadlines or meet with their advisor ahead of time to review options and discuss what works best for their situation. Some clients choose to set up automatic withdrawal schedules, which can make the process more predictable each year. This approach, whether monthly, quarterly, or annual, can help ensure the December 31 deadline is met and reduce the chance of last-minute complications.
If you would like to learn more about RMDs, charitable giving or broader year-end planning, don’t hesitate to reach out to your Exencial advisor. Together, we can make sure everything is in place so you can finish the year with confidence.
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Disclaimer: The information provided in this article is for educational purposes only and should not be considered as financial, tax or legal advice. Please consult with your financial, tax, and legal advisors to determine plans for your individual circumstances.
Exencial Wealth Advisors is an SEC registered investment adviser. Any references to the terms “registered investment adviser” or “registered,” do not imply that Exencial or any person associated with Exencial has achieved a certain level of skill or training.