the Secure 2.0 Act gives savers under the age of 72 an extra year before having to withdraw money from their retirement accounts. But just because you can defer your minimum required distribution (RMD) doesn’t mean you absolutely should, financial advisors say.
The far-reaching pension law passed late last year raised the age for RMDs from 72 to 73 in 2023. From 2033, the RMD age will be raised to 75.
The changes will most directly affect those turning 72 this year, who would otherwise have had to take their RMD by April 1, 2024. (Years RMDs must be taken by the end of the year.) Your RMD is calculated by adding your retirement account balance as of Dec 31 of the previous year by what the IRS calls your “life expectancy factor.” The resulting amount is credited as income; You must withdraw it from your account and you owe taxes on it. RMD rules apply to both traditional IRAs and employer-sponsored retirement plans such as 401(k)s and 403(b)s.
Most Americans don’t have the luxury of waiting, as they need withdrawals from their retirement accounts to keep living. But for those who can afford to wait, procrastination isn’t always the best move. If you delay your RMD and your retirement account balance increases, you’ll need to withdraw a larger amount next year. (Even if your account balance stays the same, you’ll need to withdraw more because your life expectancy factor will be lower.) Not only could the extra income increase the amount you pay in income taxes, it could as well Your Medicare premiums down the line.
“Some of the old rules of thumb about letting your tax-deferred accounts marinate for as long as possible don’t always apply,” said Josh Strange, a certified financial planner and president of NOVA’s Good Life Financial Advisors in Alexandria, Va.
Without a crystal ball of how markets will perform this year, it’s impossible to say whether the current 72-year-old could benefit from pushing their RMDs back a year, all other factors being equal. (Market participants surveyed by Barron’s expects the S&P 500 to end the year higher than current levels). But what if all other factors are not equal? Let’s say you’re 72, retire this year and move into a lower tax bracket next year. In that case it would probably make sense to move your RMD to 2024. On the other hand, if you plan to sell your primary residence next year and realize more than $250,000 in capital gains (or $500,000 if you are married together), you may want to start your RMDs this year to any potentially larger RMD to be avoided will be added to next year’s income along with your capital gains. That could trigger higher Medicare premiums for you later.
Rather than waiting until you’re on the verge of RMDs to start tax planning, you have a better chance of managing the tax consequences by starting years in advance. “The sooner the better,” said Kris Yamano, a partner at Crewe Advisors in Scottsdale, Ariz. A popular move is a Roth conversion after you retire but before you reach RMD age. You’ll likely be in a lower tax bracket during this time, so converting your traditional IRA to a Roth IRA — either all at once or staggered over a few years — means you’ll owe less tax on the converted amount than if you did it , when you were in a higher class.
Taking early withdrawals from your retirement accounts could also be beneficial. For example, if earlier payouts allow you to delay filing for Social Security until age 70 to receive your full benefit, that may be worth considering. Laurence Kotlikoff, an economics professor at Boston University who sells software that optimizes Social Security, early scenario of a hypothetical high-income couple in their early 60s who planned to retire and claim Social Security at age 64. The couple lived in New York and planned to wait until 75 to receive their RMDs. Using his software MaxiFi, he found that waiting until age 75 would be less tax-efficient for this couple than starting smooth withdrawals at age 64, since their reduction in New York State taxes and Medicare premiums would offset the increase in income Federal taxes they owed would exceed previous withdrawals.
“It’s a very complex calculation,” Kotlikoff said. “It’s really very individual.”
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