RTS #071 RMDs and Terror Threat Levels
The logic of three-letter government agencies is legendary and not unique to the IRS. On a recent trip through the airport, I learned that your terror threat level magically goes down at 75…or at least according to the TSA, that’s when you no longer have to take your shoes and jacket off to get through security.
What does this have to do with taxes? Most people wait around for government rules to kick in to take action, and that almost guarantees a less-than-ideal outcome. Meantime, the proactive ones take a little extra time (and sometimes an upfront investment) to make the most of the situation. Travelers can wait until 75 for getting through security to get a little easier, or they can spend $85 and an hour of their day to get TSA Precheck for the next 5 years (I do not get affiliate fees from the TSA, but if you don’t have Precheck and travel even once a year it’s 100% worth it).
Back to taxes. In a few years (2032, to be precise), the RMD start age is moving to 75 from the current age of 73. You, of course, can let your clients simply wait until then to take action and hope for the best, or you can choose to deliver massive value and help them proactively plan for that event in their life. For people approaching retirement, the single most powerful tool for getting ahead of the RMD hit is Roth conversions.
For clients in their peak earning years, we aren’t without options. Backdoor Roth contributions can be a great way to fill up a tax free bucket (don’t forget the order of operations on contributions, make sure they are taking advantage of other contribution opportunities first). And there are high earners that are currently and will always be in the highest tax brackets. Just like any of your other clients, if those high earners are concerned tax rates could go up in the future, why wouldn’t you lock in today’s tax rates by filling up your tax-free bucket?
Like all tax planning, what’s most important is having an intentional plan. If we let three-letter government agencies dictate our plan we lose, every time. And friendly reminder on behalf of the tax prep pros out there: tax planning only counts if it’s reported correctly so make sure you see your great planning recommendations all the way through to the 1040.
Happy Tax Planning!
P.S. Save the date. Our next webinar is on October 30th and will be all about getting Roth conversions done.
