Tax hangover tees up client discussions about new RMD strategies

Post-tax season angst is the perfect moment to open conversations with clients about tax planning strategies, IRA guru Ed Slott told acolytes Thursday morning at his annual conference for top-producing advisors in his network.

“Anybody with an IRA has a tax problem," Slott said. “Clients are more receptive to hearing from you right after tax day.”

He advised a strategy of first identifying clients who have the most at stake as a result of the junction of new legislation, inflation and current tax rates, then reviewing the specifics of their situations and plotting a plan.

“The ones with the largest IRAs are at most risk of that bunching,” Slott said of the pile-up of factors and assets.

Because the endeavor can seem to contradict traditional tax-deferral strategies, clients may need extra time to absorb the logic of the new strategy, he said.

“The tricky part is who gets to delay the [required minimum distribution] and who is stuck under the old rules,” said Sarah Brenner, director of retirement education for the Slott operation. “Once you figure out whether a client is under the old rules for taking RMDs or is covered under the new rules of SECURE 2.0, it’s business as usual.  

"It doesn’t affect how RMDs are calculated,” Brenner said. “And if you miss an RMD, there will be a penalty,” she added, a fact that often takes heirs by surprise. The IRS has often waived the penalty — but not might “continue to be so nice” under new rules, she said.

Starting in 2023, the penalty for missed RMDs will drop from 50% of the amount not taken to 25%, and perhaps as little as 10% during a “correction window.” If the IRS eases up on its penalty forgiveness, it’s possible that more people will end up actually paying penalties, Brenner said.

One RMD exception: People born in 1959 are affected by “a drafting issue” in the legislation, said IRA analyst Ian Berger, which complicates RMD timing for them, with two RMD ages, a glitch he predicted will be resolved.

The thicket of new rules, exceptions and glitches could distract clients from the  main point, he said.

“Sometimes clients get so fixated on delaying RMDs as much as possible that they lose the big picture. In some cases, it’s better for them to start taking distributions earlier,” Berger said. “And voluntarily taking distributions earlier gives them the flexibility to do conversions or buy life insurance.”