Page 39 - Investment Advisor - November 2023

some Good news About rMds in ‘23 faced the 50% penalty, very few people
In the past, Benz said, when retirees

t the start of the fourth quarter of do IRA conversions in that period when actually ended up paying it because it
A2023, millions of American retirees your income tax rate may be at a low was fairly easy to prove that they weren’t
are wondering how they will handle ebb relative to what it will be once those trying to skirt the distribution. “Now it
required minimum distributions from RMDs come online,” she explained. sounds like the penalty will potentially
tax-advantaged retirement accounts. Another factor affecting retirees this be a little harder to get out of, if you inad-
According to Morningstar’s Christine year is that the penalties for missing vertently miss the RMD,” she warned.
Benz, many are finding that their 2023 RMDs have gone down, again thanks to As Benz explains, the bigger reason
RMDs are smaller than anticipated. the Secure 2.0 Act. “The tax experts I’ve that many people might see lower RMDs
This is due to a few interrelated fac- talked to differ a little bit on this point,” for 2023 is that the U.S. market didn’t
tors, Benz says, including poor market Benz said. “So, it had been this 50% pen- have such a great year in 2022: “We had
performance in 2022 and recent rule alty on any amount that you should have a pretty big drop in the stock market,
changes introduced in landmark legisla- taken but didn’t take. That was, obvi- both U.S. and non-U.S. stocks.”
tion known colloquially as the Secure ously, a catastrophic penalty, and now Plus, “bonds did not have a great year,
Act and the Secure 2.0 Act. it’s going to [be] a 25% penalty.” either. So, many investors had declining
Benz, Morningstar’s director of per- A halving of this penalty will be a good balances at the end of 2022 versus where
sonal finance and retirement planning, thing for investors who find themselves they were at in 2021. So, even though your
shares this insight in a recently published running afoul of the rules and facing RMDs nudge up a little bit as you age,
video interview posted on the firm’s web- enforcement actions from the Internal many people, my guess is, would probably
site. According to Benz, more RMD flex- Revenue Service. And, if they are able to see lower RMDs as they’re calculating
ibility this year means that many retirees prove that they didn’t miss the RMDs on them in 2023, because they’re calculated
will be able to effectively minimize their purpose, a retiree can potentially get the on that year-end 2022 balance,” she adds.
tax obligations, and some early retirees penalty reduced to 10%. Benz encourages investors and advisors
will be able to forgo making RMDs entire- “What I hear from people who focus to take advantage of this moment in other
ly. As she explains, advisors can help older on tax planning is that they think that ways, too. “Prune your highly appreciated
clients by coordinating their RMDs with the IRS may actually be a little bit more securities,” she suggested. “Use those to
other sources of income, and they can serious about actually levying this pen- address your need to take an RMD. Take
help younger clients make moves that can alty on people who do miss their RMDs,” a good look at your portfolio and how
significantly lower their expected RMDs. Benz warned. “So, as always, it’s a date it’s situated in terms of your target asset
The Secure Act of 2019 increased the that you don’t want to mess around allocation. Use your RMD to get your
RMD age from 70.5 to 72 years, and the with. You need to get that RMD out by portfolio back into balance. It’s a little bit
Secure 2.0 Act subsequently increased Dec. 31 of the tax year.” of a freebie from a tax standpoint.”
the age again — to 73 — starting in 2023.
Under Secure 2.0, this age is to increase
once more in 2033. “It’s set to go all the the ‘Fun’ new retirement Planning Metric
way out to 75 eventually, so people may
be able to push off that date at which hile sustainable retirement-income Specifically, Estrada is referring to
they need to take those distributions,” Wplanning has always received both the “incidence of failure” metric that
Benz said. “There are reasons that peo- academic and industry-driven analysis, dominates many advisors’ Monte Carlo-
ple really like to delay those RMDs. a veritable groundswell of innovative based income planning efforts. Although
One is that RMDs can push them into research is being published on the sub- the paper includes some in-depth analy-
a higher tax bracket, and that can cause ject. One such example is a new paper sis of the math and assumptions that
some other knock-on tax effects.” published in the fall edition of the Journal underpin this style of income planning,
As she points out, those adjustments of Financial Planning by Javier Estrada, a Estrada’s answer can be summed up
to the starting date offer potentially financial advisor and professor of finance with a simple “no.” He goes on to offer
powerful tax-planning moves between at the IESE Business School in Barcelona, his own key metric that he calls the
one’s retirement age, which could be in Spain. The paper seeks to answer a seem- “risk-adjusted coverage ratio.”
the late 50s or early 60s, and the RMD ingly simple question: “In retirement The recently published paper is gen-
age. “That provides an opportunity to planning, is one number enough?” erating some buzz among U.S. financial

November 2023 Investment AdvIsor 37