The Final Few Months of 2025 Require Year-End Retirement Planning

Sharon must withdraw her 2025 inherited IRA RMD of $5,446.19 no later than December 31,2025. Note that even though Sharon is under age 59.5, there is no 10 percent IRS’ early withdrawal penalty imposed on Sharon’s 2025 inherited IRA RMD.

Traditional IRA beneficiaries who inherited traditional IRAs from traditional IRA owners who died after December 31,2019 also must withdraw the entire amount of their inherited traditional IRAs.   However, the passage of the SECURE Act of 2020 changed the rules regarding how inherited IRA beneficiaries must take their annual RMDs. The following is a summary of the SECURE Act of 2020 inherited IRA RMD rules:

1. If the IRA beneficiary is an eligible designated beneficiary, then post-death RMDs can be made over the beneficiary’s life expectancy. An eligible designated beneficiary includes: (1) The surviving spouse of the deceased IRA owner; (2) A disabled or chronically ill individual; (3) A minor child of the IRA owner; or (4) Any individual no more than 10 years younger than the IRA owner.
2. A 10-year rule applies to non-eligible designated beneficiaries. Non-eligible designated beneficiaries include adult children. Under the 10-year rule, the entire inherited IRA must be distributed on or before December 31 of the year in which the tenth anniversary of the IRA owner’s death occurs. The following example illustrates:

Example 2. Ronald, age 53, inherited a traditional IRA from his mother who died in 2021 at age 78. Ronald is a non-eligible designated beneficiary. He must withdraw his entire inherited traditional IRA by December 31, 2031, the end of the tenth year following Ronald’s mother’s death.

Non-eligible designated beneficiaries are subject to annual RMDs within the 10-year period. The 2025 RMDs must be taken by December 31, 2025. In example 2, Ronald must take his 2025 inherited IRA RMD no later than December 31, 2025.

Federal employees and retirees who are traditional non-eligible designated beneficiaries should note that 2025 is the first year that the required annual RMDs required by IRS will need to be taken. Annual RMDs during the 10-year period for the years 2021, 2022, 2023 and 2024 were waived by the IRS. Despite the waiver for four years’ worth of RMDs, the 2025 RMD factor is still determined as if RMDs were in effect during the years 2021 through 2024. Assuming that an inherited traditional owner has not made any withdrawals from his or her inherited IRA during the period 2021 through 2024 and the IRAs increased in value, the result will likely be larger RMDs starting in 2025. Larger traditional RMDs will likely result in additional taxable income and additional  federal and state income taxes.  In example 2, assuming Ronald did not take any inherited traditional IRA RMDs for the years 2022, 2023 and 2024 (his mother died in 2021), he may want to take more than the just the RMD during the years 2025 through 2030. In so doing, he will have less withdraw in a lump sum before December 31,2031 which is the end of ten-year period and the deadline for withdrawing the balance in his inherited traditional IRA.

Recommendations for Converting Traditional IRAs to Roth IRAs

Those federal employees and retirees who want to convert some of their traditional IRAs to Roth IRAs are advised to spread their conversions over a period of years in order to avoid being pushed into a higher marginal tax bracket in any year. This is because the conversion of a traditional IRA to a Roth IRA is a taxable event, with the amount converted included in that year’s income.

Traditional IRA owners are also advised to wait until later in the year before converting in order to get a better picture of their current’ year’s tax situation. However, traditional IRA owners should not wait until the last week of December to convert because some IRA custodians will not process conversions for the current year during the last weeks of December.

The passage of the OBBBA also brought good news to federal employees and retirees looking to convert their traditional IRAs to Roth IRAs. One of the provisions of OBBBA was making permanent the reduced income tax rates enacted in the Tax Cut and Jobs Act of 2017. Another provision coming out of OBBAA is individuals over age 65. Starting in 2025, individuals over 65 are eligible for  an additional standard deduction of $6,000 ($12,000 if married filing jointly and both spouses are over age 65). Older federal employees and retirees will certainly want to take advantage of the $6,000/$12,000 extra standard deduction that will be in effect during 2025 through 2028.

Because Roth IRA conversions result in additional income, Roth IRA conversions can push older employees and retirees over the extra $6,000/$12,000 adjusted gross income (AGI) phase-outs created by OBBBA ($75,000 - $175,000 AGI for single; $150,000 -$200,000 AGI) for married filing jointly).  However, even with the potential loss of the $6,000/$12,000 additional standard deduction, Roth IRA conversions for many employees and retirees are worth the current cost in order to help  minimize taxes in the future as well as to minimize future Medicare Part B and Medicare monthly premium costs.

The case studies provided are for illustrative purposes only. Individual cases will vary. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Prior to making any investment decision, you should consult with your financial advisor about your individual situation. Contributions to a traditional IRA may be tax-deductible depending on the taxpayer’s income, tax-filing status, and other factors. Withdrawal of pre-tax contributions and/or earnings will be subject to ordinary income tax and, if taken prior to age 59 1/2, may be subject to a 10% federal tax penalty. Unless certain criteria are met, Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals are permitted. Additionally, each converted amount may be subject to its own five-year holding period. Converting a traditional IRA into a Roth IRA has tax implications. Investors should consult a tax advisor before deciding to do a conversion. RMD's are generally subject to federal income tax and may be subject to state taxes. Consult your tax advisor to assess your situation.

Edward A. Zurndorfer is a CERTIFIED FINANCIAL PLANNER™ professional, Chartered Life Underwriter, Chartered Financial Consultant, Chartered Federal Employee Benefits Consultant, Certified Employees Benefits Specialist and IRS Enrolled Agent in Silver Spring, MD. Tax planning, Federal employee benefits, retirement and insurance consulting services offered through EZ Accounting and Financial Services, and EZ Federal Benefits Seminars, located at 833 Bromley Street - Suite A, Silver Spring, MD 20902-3019 and telephone number 301-681-1652. Raymond James is not affiliated with and does not endorse the opinions or services of Edward A. Zurndorfer or EZ Accounting and Financial Services. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.