If you’re saving for retirement through the Aramco Savings Plan, it's crucial to understand how the IRS’ required minimum distributions (RMDs) impact you. Once you turn 73 (if born in 1959 or earlier) or 75 (if born in 1960 or later), the IRS mandates withdrawals from your tax-deferred accounts, such as IRAs and 401ks. A common scenario among Aramco retirees is accumulating more wealth in tax-deferred accounts, such as the Vanguard 401k and the Retirement Income Pension (RIP). As RMDs increase with age, market growth, or both, this can lead to large, unwanted tax burdens. RMDs can be properly managed through drawdown strategies, Roth conversions and qualified charitable contributions (QCDs).
Retirement income planning doesn’t start right before retirement — it starts well in advance and continues for the rest of your life. At any age, Aramco employees have time to implement strategies to reduce future RMDs and taxes.
Following are five essential things to keep in mind.
#1 – 401ks and IRAs: Key Differences for Aramco Employees
While working for Aramco, you may have accumulated significant assets in your 401ks and IRAs. It's important to know that 401ks and other employer-sponsored plans, like those offered by Aramco, require separate RMDs from each account. Unlike IRAs, you can’t aggregate RMDs across multiple 401ks. Keeping track of multiple RMDs in your 70s and 80s can be a challenge, especially given the next consideration.
#2 – Missing RMDs Come With Steep Penalties
If you miss an RMD, the penalty is 25% of the amount that should have been withdrawn, which can significantly impact your savings. That’s in addition to the income tax owed on the withdrawal. Fortunately, for retirees who act quickly, the penalty can be reduced to 10% or even waived if you can show a reasonable cause for the error. However, that determination is up to the IRS, and early action is critical.
#3 – RMD Rules for Inherited Accounts
If someone inherits an IRA or a 401k from someone other than their spouse, new rules apply. The beneficiaries are now required to withdraw the entire balance within 10 years if the original owner died in 2020 or later. This change can complicate both tax and estate planning.
#4 – RMD Taxation for U.S. Expats and Non-Citizens
If you’re an Aramco retiree living abroad, the IRS may withhold up to 30% of your RMDs for tax purposes, especially if you’re a non-U.S. citizen or resident. The tax withholding amount may differ based on tax treaties between the U.S. and the country where you now reside. This issue is further complicated for families composed of U.S. and non-U.S. citizens.
#5 – Understanding Pre-Tax, Roth and After-Tax Savings
The Aramco Savings Plan has the above three components, and determining which to save to depends on your individual financial situation. Pre-tax savings, when withdrawn, are taxed as ordinary income. Roth savings, when withdrawn, are not taxed so long as you meet all requirements. After-tax savings grow within the plan but in a poor tax manner. You’ve paid taxes and then saved to this bucket; however, the growth on this amount is taxed at ordinary rates. More to come on this in our next article.
Need some help navigating your retirement income or RMD planning? Creative Planning International is here for you. We work with Aramcons and cross-border families to help them maximize their wealth and avoid costly mistakes, especially when it comes to paying taxes. We understand the complex interaction of multi-jurisdiction tax and regulatory regimes and take into account currency, diversification and other portfolio considerations as we help implement custom tax planning strategies to meet your specific needs.
To learn more, please email aramco@creativeplanning.com. Wealth managers Gabrielle Reilly and Hanna Kennedy will be in Dhahran November 8-16, 2024. If you’d like to schedule your first meeting in person, please indicate this in your email.
This commentary is provided for general information purposes only and should not be construed as investment, tax or legal advice, and does not constitute an attorney/client relationship. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable but is not guaranteed.
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