Try These RMD Options for 6 Common Client Situations

Start Slideshow

Required minimum distributions, one topic that retirement-focused clients may worry about the most, are subject to a complex and evolving set of rules and regulations that leaves many feeling confused about their options.

The big picture is simple enough: Once clients reach a certain age, they need to take RMDs each year from their tax-deferred 401(k) and individual retirement accounts — or face harsh penalties.

Exactly what age RMDs kick in varies depending on the year the client was born, and the amount of an RMD is calculated for each account by dividing the prior Dec. 31 balance of that IRA or retirement plan account by a life expectancy factor published by the Internal Revenue Service.

Another complicating factor is the moving RMD age, which now stands at 73 after being increased to 72 last year from the prior age of 70.5. Under the Setting Every Community Up for Retirement Enhanement (Secure) 2.0 Act, this age is set to increase to 75 in 2033.

While this framework is certainly complex, it also presents advisors and clients with significant flexibility. There are opportunities to take key financial steps ahead of clients’ RMD date that can lead to significantly reduced taxes and greater overall retirement wealth.

These dynamics are explored in a recent analysis published by Amanda Lott and Sarah Backer at J.P. Morgan Private Bank. As the pair emphasize, RMD rules are easy to misunderstand, and there are big potential penalties for missing RMDs.

That’s why it’s important for clients to get familiar with current rules and speak with their advisor regularly about the best way to organize RMDs and how to implement the various strategies that can be tapped ahead of the RMD date.

“Besides helping [clients] avoid pitfalls, we can also explore strategies together that may increase the value of their retirement accounts,” they explain.

See the accompanying slideshow for a review of six RMD options that clients can consider using in 2023 and beyond.