Tax efficient retirement planning requires planning – The Ukiah Daily Journal


Large retirement account balances can cause tax problems.

It may seem like a good idea to stash away distributions and hold assets in your retirement accounts as much as possible, but waiting too long can cause big tax problems. When you turn 73, the trigger that requires minimum distributions (RMDs) from qualifying retirement accounts begins, which can result in unwanted tax liabilities.

RMDs explained.

The required minimum distribution is a formula that calculates how much you must withdraw from your retirement account each year for traditional IRAs, SEP IRAs, SIMPLE IRAs, 401(k), 403(b) and other defined contribution plans. Failure to make the minimum distribution may result in a 25% penalty on amounts not distributed on time (or 10% if the problem is corrected within two years).

Warning: Before 2023, the RMD penalty was a whopping 50 percent!

Fortunately, there are other important rule changes that affect the required minimum distribution:

No outlets are needed while still working. As long as you’re still working and don’t own 5% or more of the company, you can delay withdrawing funds from employer plans, such as a 401(k) over the past 73 years.

RMD rules are different for Roth accounts. Roth IRAs are not subject to RMD rules while you live. And starting in 2024, Roth 401(k) and Roth 403(b) have no minimum withdrawal requirements.

The RMD rules ensure that the tax-deferred benefit of certain retirement accounts is not extended indefinitely into the future. In other words, the IRS applies income taxes to your tax-deferred savings account balances to claim their deductions. The amount you need to withdraw each year depends on your age, your spouse’s age and your filing status.

The possibility of tax planning

If you wait to start withdrawing money from your retirement account, the balance in your account may be too high by the time you turn 73. If required retirement plan distributions are sufficient, a higher marginal tax rate may be applied to withdrawals and may trigger taxes on Social Security benefits. Depending on your income and filing status, up to 85 percent of your Social Security benefits may be subject to income tax.

The key is to be tax efficient on your annual withdrawals, and the necessary minimum distribution rules will eliminate your plan’s efficiency long before you reach it.

Some useful tips

Planning. Once you turn 59½, you can withdraw money from qualified, tax-deferred retirement accounts without incurring an early withdrawal penalty. To reduce future tax exposure on Social Security benefits, manage annual payments from your retirement account(s) to be more tax efficient when you turn 73.

Start receiving Social Security. Once you reach the minimum retirement age, you can begin receiving full Social Security benefits. But remember, if your start date of receiving Social Security benefits is delayed until age 70, your benefit amount may increase. Consider this as a tax efficient plan.

See Counselor. There are many moving parts to planning for retirement. These include Social Security benefits, retirement plans, savings, and retirement accounts. Ask for help creating the right plan for you and your family. Part of the plan should include tax efficiency to avoid tax torpedoes.

James Angell is a certified public accountant based in Wilts. His office is at 461 S. Main St. Available at and can be reached at 707-459-4205.

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