Personal Finance

How to use required minimum distributions to improve your portfolio

Published

5 months ago

August 21, 2024

Richard Drury | Digitalvision | Getty Images

After funneling money into pretax retirement accounts, you’ll eventually face mandatory withdrawals in retirement known as required minimum distributions, or RMDs.

Since RMDs can trigger higher taxes, the withdrawals can be a nuisance for some retirees who don’t need the money. But the yearly activity could offer a chance to improve your portfolio, experts say.

“Ultimately, you look at your portfolio and say, what do I want to trim?” said certified financial planner Matthew Saneholtz, chief investment officer and senior wealth advisor at Tobias Financial Advisors in Plantation, Florida.

Since 2023, most retirees need to begin RMDs by age 73, based on changes enacted by Secure 2.0. That age jumps to 75 starting in 2033.

While the annual RMD deadline is Dec. 31, you’ll have until April 1 after the year you turn 73 to make your first RMD. If you skip yearly RMDs or don’t take enough in a given year, there’s a 25% penalty on the amount you should have withdrawn.

Rebalance your investments

Your asset allocation, or investment mix, drifts throughout the year as markets move. But you can use RMDs to shift assets back to your intended percentages, based on risk tolerance, goals and timeline.

“Every client in my practice has a target asset allocation, so I sell a holding from whichever asset class or classes they happen to be overweight in at the time,” which is typically U.S. stocks, said CFP Paul Winter, president of Five Seasons Financial Planning in Salt Lake City, Utah.

Every client in my practice has a target asset allocation, so I sell a holding from whichever asset class or classes they happen to be overweight at the time.

Paul Winter

President of Five Seasons Financial Planning

As you weigh assets to sell, you should avoid selling investments when they are down to avoid the so-called “sequence of returns risk,” which can shrink your portfolio over time, experts say.

Withdrawing assets during stock market downturns could mean selling more investments for the same-sized RMD. That could leave fewer investments to capture future growth when the market rebounds.

Shift your ‘tax location’

You can also use RMDs to adjust your “tax location,” or the types of investments in certain accounts to minimize future levies, Saneholtz said.

Withdrawals from pretax retirement accounts incur regular income taxes, depending on your federal bracket, and brokerage accounts are subject to capital gains taxes. Meanwhile, Roth accounts generally grow tax-free.

If you don’t need the RMD, you could use funds to reinvest in a brokerage account. While the move wouldn’t reduce current-year taxes, future asset growth could have more favorable capital gains tax treatment.

Maximizing your Social Security benefits

Personal Finance

Missing quarterly tax payment could trigger ‘unexpected penalties’

Published

1 hour ago

January 9, 2025

Business Finance News

Israel Sebastian | Moment | Getty Images

The fourth-quarter estimated tax deadline for 2024 is Jan. 15, and missing a payment could trigger “unexpected penalties and fees” when filing your return, according to the IRS.

Typically, estimated taxes apply to income without withholdings, such as earnings from freelance work, a small business or investments. But you could still owe taxes for full-time or retirement income if you didn’t withhold enough.

You could also owe fourth-quarter taxes for year-end bonuses, stock dividends, capital gains from mutual fund payouts or profits from crypto sales and more, the IRS said.

Federal income taxes are “pay as you go,” meaning the IRS expects payments throughout the year as you make income, said certified public accountant Brian Long, senior tax advisor at Wealth Enhancement in Minneapolis.

If you miss the Jan. 15 deadline, you may incur an interest-based penalty based on the current interest rate and how much you should have paid. That penalty compounds daily.

Tax withholdings, estimated payments or a combination of the two, can “help avoid a surprise tax bill at tax time,” according to the IRS.

What to know about the ‘safe harbor’ rules

One way to avoid penalties is by following the “safe harbor” rule, which means “you’re meeting that [IRS] pay-as-you-go requirement,” according to Long.

To satisfy the rule, you must pay at least 90% of your 2024 tax liability or 100% of your 2023 taxes, whichever is smaller.

The threshold increases to 110% if your 2023 adjusted gross income was $150,000 or higher, which you can find on line 11 of Form 1040 from your 2023 tax return.

However, you could still owe taxes for 2024 if you make more than expected and don’t adjust your tax payments.

“The good thing about this last quarterly payment is that most individuals should have their year-end numbers finalized,” said Sheneya Wilson, a CPA and founder of Fola Financial in New York.

How to make quarterly estimated tax payments

Personal Finance

California wildfire relief: Where to give

Published

4 hours ago

January 9, 2025

Business Finance News

Firefighters work as a brush fire burns in Pacific Palisades, California on Jan. 7, 2025.

David Swanson | AFP | Getty Images

Massive wildfires are devastating the Los Angeles area of Southern California. As of Thursday morning, at least five people were killed, more than 100,000 residents have been ordered to evacuate and nearly 2,000 homes and businesses were destroyed.

Many people around the country, and world, want to help, whether by donating money or emergency supplies. However, there are already fundraising scams trying to capitalize on the crisis.

To make sure your funds get into the right hands, third-party evaluator Charity Navigator compiled a list of highly rated nonprofits currently engaged in relief and recovery efforts in the Pacific Palisades and the surrounding areas — including support for first responders.

“We’ve vetted the organizations that are there,” said Michael Thatcher, CEO of Charity Navigator. “These are all outstanding.”

Here are some of the groups that earned high marks from the organization for providing immediate support to the victims of the wildfires and wildfire-affected communities.

How to avoid wildfire-related scams

Unfortunately, as with any high-pressure donation, there will be an increase in fraudulent behavior, said Thatcher, “and what we encourage people to do is be proactive rather than reactive to a solicitation.”

As a general rule, rather than follow a link in a text, email or on social media, go directly to a charity’s website or find a relief effort through a site such as Charity Navigator, BBB Wise Giving Alliance or CharityWatch, Thatcher said.

“There’s a safety element and a legitimacy element,” he said. “At the end of the day we want to make a difference to the people affected by this fire.”

The BBB Wise Giving Alliance also offers tips for donating to the California wildfire relief efforts.

It recommends donors check whether a charity is accredited and take extra precautions on crowdfunding sites, including reviewing how postings are screened as well what transaction fees may apply.

In addition, be wary of relief appeals that have vague descriptions or do not explain what programs your support will assist.

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Personal Finance

New Social Security increases may prompt higher tax bills, Medicare premiums

Published

23 hours ago

January 8, 2025

Business Finance News

Sdi Productions | E+ | Getty Images

Nearly 3 million individuals are poised to see their Social Security benefits increase, thanks to new changes signed into law by President Joe Biden this week. But with the higher checks could come additional tax burdens.

The Social Security Fairness Act — which passed by a bipartisan majority in both the House and Senate — ends reductions of Social Security benefits for certain individuals who also receive pension income from work in the public sector as firefighters, police officers, teachers and local, state and federal employees.

Those beneficiaries are set to see an increase to their monthly benefit checks. Because the legislation applies to benefits paid throughout 2024, they will also receive lump-sum payments to make up for that time.

The details of how those increases will be implemented are now being determined, according to the Social Security Administration.

In total, the benefit increases will cost $196 billion over a decade, according to the Congressional Budget Office. The additional outlay will move Social Security’s trust fund depletion dates six months closer. The program’s combined trust funds may pay full benefits until 2035, at which point just 83% of scheduled benefits may be payable, the program’s trustees projected last year.

How Social Security benefits may change

About 2.1 million beneficiaries — those who were affected by the Windfall Elimination Provision, or WEP — may see $360 more in monthly benefits on average, according to CBO estimates as of December 2025. The WEP, which has now been eliminated, reduced Social Security benefits for workers who also had pension or disability benefits from jobs where they did not pay Social Security payroll taxes.

Additionally, about 380,000 spouses would see average benefit increases of $700 and 390,000 surviving spouses would see an average of $1,190 more, according to CBO’s estimates for December 2025.

Those beneficiaries were affected by the now-defunct Government Pension Offset, or GPO, which reduced Social Security benefits for spouses, widows and widowers who also receive their own pensions from public sector work.

The elimination of the provisions in many ways simplifies retirement income planning for affected beneficiaries, financial advisors say.

“For the people who are affected by this, you’re looking at a pretty significant increase, in many cases, of what their retirement income is going to be,” said Michael Daley, director of marketing at HealthView Services. “It’s good news for them.”

For financial planners and their clients, the challenge now is gauging how much of a benefit increase to expect and when to expect it, said Joe Elsasser, founder and president of Covisum, a Social Security claiming software company.

The extra income may also present some complications when it comes to affected beneficiaries’ taxes and Medicare premiums, experts say.

Beneficiaries could see higher taxes on benefits

Social Security beneficiaries may have their benefits taxed if their income falls over certain thresholds, experts say.

The additional money may also push some affected beneficiaries into higher tax brackets, according to HealthView Services.

Notably, President-elect Donald Trump has said he wants to nix taxes on Social Security benefit income, though it remains to be seen whether that change will be put into effect. However, per current rules, up to 85% of Social Security benefit income may be taxed.

The income thresholds upon which those levies are based are not adjusted annually for inflation. Consequently, more beneficiaries are subject to those taxes on benefits over time, including middle class households, Daley said.

Those levies are determined based on a formula called combined income — the sum of adjusted gross income, nontaxable interest and half of Social Security benefits.

Individuals pay taxes on up to 50% of their benefits if their combined income is between $25,000 and $34,000, or for married couples with between $32,000 and $44,000.

Individuals may pay taxes on up to 85% of their benefits if their combined income is more than $34,000; or for married couples with more than $44,000.

“Because Social Security benefits are taxed differently than everything else, people are going to really want to pay attention to their other sources of income,” Elsasser said of the anticipated benefit increases and lump sum payments.

For example, if a retiree has both a taxable account and traditional individual retirement account, they may want to prioritize withdrawals from the taxable account because only the gains would be taxed rather than the entire withdrawal, Elsasser explained. In the event the lump-sum payment of retroactive Social Security benefits is not distributed, they may take an IRA withdrawal later in the year.

Beneficiaries may see higher Medicare costs

Additional benefit income for individuals affected by the Social Security Fairness Act may also result in higher income-based surcharges for Medicare Parts B and D.

Medicare beneficiaries with higher incomes must pay what’s known as income-related monthly adjustment amounts, or IRMAAs, for their Part B and Part D premiums.

“If you get a lump sum but you’re not paying attention to your other incomes, you could unwittingly be pushed into higher Medicare premiums two years down the road,” Elsasser said.

That will mostly be a concern for people who are on the cusp of the income thresholds, he said.

In 2025, Medicare Part B beneficiaries who file individual tax returns with $106,000 or less in modified adjusted gross income — or married couples who file jointly with $212,000 or less — pay a standard monthly premium of $185 per month.

Beneficiaries above those income thresholds pay higher Part B premium payments, based on an IRMAA. This year’s rates are based on income on tax returns filed in 2023.

In 2025, Part D beneficiaries over the $106,000 threshold for individuals and $212,000 for married couples are also subject to income-related monthly adjustment amounts in addition to their plan premiums. Those monthly premiums are also based on yearly income reported on tax filings for 2023. In 2025, the national base Part D premium is $36.78.

Steps to take now

Beneficiaries who are affected by the Social Security Fairness Act should consider consulting with a financial advisor to assess the implications of the change on their personal financial circumstances, said Ron Mastrogiovanni, chairman and CEO of HealthView Services.

Additionally, it would help to sit down with a certified public accountant when filing their taxes to plan for 2025, he said.

The Social Security Administration also plans to provide more guidance on the new law as more details become available.

For now, the agency recommends verifying that direct deposit and mailing address it has on file is still accurate. To update that information, the Social Security recommends changing it online or calling or visiting a Social Security office in person.