Issues to consider when planning retirement finances

Following are some of the issues you should be re-viewing in 2024 regarding making withdrawals from your retirement accounts, making charitable contributions, considering Roth conversions and making decisions regarding investment options in 2024.

Larger RMDs in 2024

It is likely that if you had significant investments in equities in your retirement accounts, your portfolio at year-end 2023 increased substantially from the beginning of the year.

This means that if you have reached the age when required minimum distributions apply, you will be required to make larger withdrawals from your requirement accounts. The required distributions are based on two factors: the size of your retirement accounts at the end of 2023 and your new life expectancy. Every year, as you age, the IRS requires you to take a larger percentage of your yearend account balance from your retirement account to meet the required minimum distribution.

Future tax rates

No one is happy to take larger required minimum distributions and incur higher federal taxes as a result. However, when you decide the size of the withdrawals you take in 2024, you should take into consideration your current marginal tax rate as well as the one you will face in subsequent years. In 2024 and 2025, your marginal tax rates will be lower than they will be in 2026, when tax rates will increase.

Possible Roth conversions in 2024

As your traditional IRA and 401(k) account balances increase, you are facing higher federal income taxes. When you convert some of the balances to Roth accounts, there are two advantages: You will not be incurring income taxes on future withdrawals from Roth accounts, and your beneficiaries will not be incurring income taxes on Roth accounts they inherit. Because of the SECURE Act provisions, most future beneficiaries will be facing the 10-year rule, which means that after inheritance, they will be required to liquidate their inherited accounts 10 years after inheritance.

The disadvantages associated with Roth conversions are that the amount you withdraw is subject to income taxes in the year of conversion, and you may be facing an increase in Medicare surcharges if your new income level is too high. However, you should take into consideration that your marginal tax rate will increase in 2026.

Qualified charitable deductions

Once you reach age 70 ½, if you contribute to qualified charities, because of provisions of the SECURE 2.0 Act, owners of retirement accounts and their beneficiaries can reduce their federal taxes. The annual limit of charitable contributions has increased in 2024 to $105,000 per year from $100,000. In order to take advantage of the qualified charitable deduction option, you have to make your contribution from your retirement account before you take other distributions from your account to meet the required minimum distribution for the year. The tax advantage is only associated with traditional retirement accounts, not Roth accounts. The contribution has to be made through the custodian of your retirement account. If you use this option, your tax saving will be based on the amount of your charitable contribution and your marginal tax rate. So, for example, if you contribute $1,000, and your marginal tax rate is 22%, your tax saving would be $220.

Investing options in 2024

Because the federal reserve increased interest rates in 2023, conservative savers were able to invest in safe instruments such as CDs, Treasury bills and money-market funds and receive returns in excess of 5%. As a result, many investors who saw losses in their bond funds/ETFs and equities in 2022 transferred a great deal of their investments into safe investments.

Currently, investors can still obtain returns of 5% or more with safe investments. However, it is possible that the federal reserve in 2024 will start taking actions that will reduce interest rates, and the return for the safe investments may start to fall. So, you may want to consider using dollar-cost averaging to invest more in conservative equity alternatives such as S&P 500 index funds or other diversified options.

In the long run, returns associated with diversified equity funds have provided higher returns than the conservative investments I referred to. However, any investment in equities has more risk, so if you can't afford short-term risks, you can continue to invest primarily in safe investments such as CDs, Treasury bills and money-market funds to preserve your capital.

Elliot Raphaelson welcomes your questions and comments at [email protected].