Accounting for Taxes
Many retirees are surprised to find that they must make federal and state quarterly estimated payments based on the amount of their RMD, which can effectively reduce the amount they take out of their accounts by 25% or 30% or more.
Investing in a taxable account before retirement is one strategy that can potentially mitigate the adverse effect that tax-deferred savings can have once you are retired. We discussed some of the advantages of this strategy for pre-retirees in The Case for Taxable Retirement Investing: Part 1.
Quantifying the Impact
Consider the following hypothetical example. For a retiree with a $1 million retirement account who turned 72 in 2021, the FINRA Required Minimum Distribution Calculator estimates a withdrawal factor2 of 25.6, resulting in additional annual income of $39,063.3 Depending on your federal bracket, this could generate a tax liability of more than $1000 a month, reducing that withdrawal by $12,500.
Effect of Taxes on RMDs: Federal 2021 Federal Tax Brackets
|RMD Amount||Federal Bracket4||Estimated Tax||RMD After Tax|
Taxable Accounts Don’t Have Distribution Requirements
But remember, RMDs apply only to retirement plan accounts. Taxable accounts have no distribution requirements, so investments are free to keep compounding over time. While taxable accounts are often an afterthought in retirement planning, using them correctly may help avoid this type of RMD problem.
2 RMD Withdrawal Factor: The Required Minimum Distribution (RMD) that plan participants must begin distributing from their retirement accounts by April 1 following the year they reach 72. It is your retirement account balance as of 12/31 of the prior year divided by your life expectancy factor.
3 FINRA RMD Calculator (calculation completed on Jan. 19, 2022 using a previous year-end balance of $1 million and age at year-end of 72) https://tools.finra.org/rmd/
4 IRS, “IRS provides tax inflation adjustments for tax year 2021,” https://www.irs.gov/newsroom/irs-provides-tax-inflation-adjustments-for-tax-year-2021
Investing involves risk, including the risk of loss. The views and opinions are as of Q1 2022 and may change based on market and other conditions. This material is provided for informational purposes only and should not be construed as investment advice. There can be no assurance that developments will transpire as forecasted. Actual results may vary. Although Natixis Investment Managers believes the information provided in this material to be reliable, including that from third party sources, it does not guarantee the accuracy, adequacy or completeness of such information.
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