Can there be too much of a good thing? After all, it’s not uncommon for us to think more of a good thing is always better. Heck, even Mark Twain once said, “Too much of anything is bad, but too much good whiskey is barely enough.”
But I’d say yes, you can get too much of a good thing . . . including whiskey, trust me. Really, anything that’s good for you also has the potential to be harmful. Too much alcohol, good food, over-exercising, even too much solitude can be concerning if we take it to the extreme. As I try to teach my girls, “Moderation in all things, especially moderation.”
But what about our finances? Can we ever have too much money? This is an age-old debate about how much is enough and how much is excessive. I’m sure we can all appreciate the stress that comes with not having enough money, whether we’re talking about covering the mortgage payment or having enough to sustain our retirement; this is often the cause of so much stress for those in or preparing for retirement. On the opposite side of the argument is the suggestion that having too much money can be harmful as well. As an example, we can look to some celebrities or sports figures who have all the money they could ever need plus some – but it seems like all the money in the world isn’t enough to bring them happiness.
But you know, most of us live somewhere in between these two extremes. If you’ve planned well and saved judiciously, you may be lucky enough to have the income you need for a comfortable retirement. As I’ve said many times over our years together, it’s not just how much money you have in retirement, rather how much income your money can produce. Take a long-time client of mine, I’ll call him Allen. He’s a young seventy-four and has been a widow for the last six years. Before the death of his wife, they saved diligently for retirement for decades. He has amassed a substantial sum in his Traditional IRA’s and we decided to invest the money he received from his wife’s life insurance policy into a downside risk mitigation brokerage account. Needless to say, while he’s not movie-star rich, he’s quite comfortable. His primary focus has now shifted away from accumulating money for retirement to sheltering as much as possible from taxes from those Washington Wizards on capitol hill.
I met Allen recently for his annual planning meeting. He’s fortunate enough with his investments that he doesn’t really need the money in his IRA for his living expenses and would rather not use it. Unfortunate for him, though – the IRS doesn’t care if he needs it or not. Since he is over age 72, he is required to take a Required Minimum Distribution (RMD) from his IRA each year. You see, folks, money in qualified retirement plans like a 401k or IRA is contributed pre-tax. This means it is not subject to taxes in the year it was contributed. The goal here is to encourage consumers to save for retirement and grow their money faster.
But there’s a catch. These funds are what we call “tax-deferred”, not “tax-free”. Those hungry Washington Wizards on capitol hill are not going to sit by and wait forever for his share of these funds. IRS tax laws require that any funds invested in tax-deferred retirement plans must start to be distributed once you turn age 72, and these withdrawals will be taxable at your current tax rate when taken. And get this, if you don’t take your required RMD, you get whacked with a penalty of 50% of the amount you should have withdrawn but didn’t.
But there’s a little slice of hope here today. The formula that the IRS uses to calculate your RMD is based on life expectancy tables. These tables have not been updated for over twenty years – until now.
The IRS has just updated these tables in November 2020. The life expectancy has increased in these tables. For example, the new table has a life expectancy for someone born today of 84.6 years, versus 82.4 years in the old table. This means that RMDs are slightly lower since IRA withdrawals are expected to be spread out over a longer lifetime.
And in spite of the recent decrease in overall life expectancy due to the COVID-19 pandemic, on average life expectancies have increased. While the new tables do not reflect substantial changes, the changes result in reduced RMDs for almost all individuals, a result of larger life expectancy factors.
Let’s look at an example of how the new tables will change RMDs. For instance, let’s assume “Gwen” is turning 77 in 2022, going through the process to determine her RMD on a $1 million IRA (and assuming her designated beneficiary is not her spouse who is 10 years younger). She would divide the applicable factor from the uniform lifetime table, which is 22.9. Thus, her 2022 RMD is $43,668.12. The old tables had her RMD at $47,169.81. Her reduction: $3,500.
You can see how this can result in a decent “savings”. Allen and I reviewed these new RMD tables for his own situation and he was pleased to see that he will benefit quite nicely from them. And while the amount may not seem like much compared to your total wealth, every little bit helps. This is just one small piece of an overall tax savings program that can add up over time. So, it’s time to make some changes where you can within your sound retirement system . . . and the IRS has handed us one effective way to do so.
So as always – be vigilant and stay alert, because you deserve more!
Have a great week.
Jeff Cutter offers investment advisory services through Cutter Financial Group, LLC, an SEC Registered Investment Advisor with offices in Falmouth, Duxbury, and Mansfield. Jeff can be reached at firstname.lastname@example.org.
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