The Secure 2.0 Act gives savers under 72 and under an extra year before they can withdraw money from your retirement accounts. But just because you can defer your required minimum distributions (RMDs) doesn’t mean you must, say financial advisors.
Passed late last year, the Comprehensive Retirement Law raised the age for RMDs in 2023 from 72 to 73. The RMD age will increase to 75 in 2033.
The changes most immediately affect people who turn 72 this year, who would otherwise have been required to take their RMDs by April 1, 2024. year, RMDs must be taken through the end of the year.) Your RMD is calculated by dividing your retirement account balance on December 31 of the prior year by what the IRS calls your “life expectancy factor.” The resulting amount is counted as income; You have to withdraw it from your account and you have to pay tax on it. RMD rules apply to traditional IRAs as well as 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 survive. But among those who can wait, postponing isn’t always the best move. If you delay your RMDs and your retirement account balance increases, you’ll need to withdraw a larger amount the following year. (Even if your account balance remains constant, you will have to withdraw more because your life expectancy factor will be lower.) Not only can additional income increase the amount you pay in income tax, but can also lower your Medicare premiums. ,
“Some of the old rules of thumb, like whether you should let your tax-deferred accounts last as long as possible, don’t always apply,” says Josh Strange, certified financial planner and president of Good Life Financial Advisors of Nova in Alexandria. , VA.
Without a crystal ball to show how the market will perform this year, it’s impossible to say whether current 72-year-olds might benefit from deferring their RMDs by a year, all other factors being equal. (Market participants surveyed by Barron’s expect the S&P 500 to end the year higher than its current level). But what if all other factors are not equal? Let’s say you’re 72, expect to retire this year, and will be in a lower tax bracket next year. In that case, postponing your RMDs until 2024 probably makes sense. On the other hand, if you plan to sell your primary residence in the next year and have a capital gain of more than $250,000 (or $500,000 if you’re filing jointly), you might You may want to start your RMDs this year, possibly with your capital gains adding a larger RMD to next year’s income. This could trigger higher Medicare premiums for you down the line.
Rather than waiting until you’re at the peak of your RMDs to do tax planning, you’ll have a better chance of managing tax consequences if you start years ago. “The sooner, the better,” said Chris Yamano, partner at Crave Advisors in Scottsdale, Ariz. One popular move is doing a Roth conversion after you retire but before you reach RMD age. You’ll probably be in a lower tax bracket during that time, so converting your traditional IRA to a Roth IRA — either all at once or staggered over a few years — will mean you’ll owe less in taxes on the converted amount than if you had Did it when you were in a higher bracket.
It may also be beneficial to make withdrawals from your retirement accounts before you plan. For example, if taking earlier withdrawals allows you to postpone claiming Social Security until age 70 in order to receive your full benefit, it may be worth considering. Lawrence Kotlikoff, an economics professor at Boston University who sells Social Security optimization software, ran the scenario of a hypothetical high-earning couple in their early 60s who decide to retire and claim Social Security at age 64. Planned. The couple lived in New York and planned to wait until age 75 to take their RMDs. Using their software, MaxiFi, they found that waiting until age 75 would be less tax-efficient for the couple than starting spontaneous withdrawals at age 64, because of their higher income in New York state taxes and Medicare premiums. The shortfall would be more than offset by the increase in federal taxes they owed. earlier withdrawal.
“It’s a very complicated calculation,” Kotlikoff said. “It’s really very individual-specific.”
Write to Elizabeth O’Brien at firstname.lastname@example.org