The Secure 2.0 law gives savers aged 72 and under an extra year before having to withdraw money from their retirement accounts. But just because you can defer your required minimum distribution (RMD) doesn’t mean you have to, say financial advisers.
Passed late last year, the sweeping retirement law raised the age of RMDs to 73 in 2023 from 72. From 2033, the age of RMDs will increase to 75 years.
The changes most immediately affect those turning 72 this year, who would otherwise have had to take their RMD before April 1, 2024. (The Internal Revenue Service is giving newcomers a grace period until the spring of the following year years, RMDs must be taken at the end of the year.) Your RMD is calculated by dividing your retirement account balance as of December 1st. 31 of the previous 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 will have to pay taxes 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 because they need withdrawals from their retirement accounts to live on. But among those who can afford to wait, postponing isn’t always the best decision. If you delay your RMD and your retirement account balance increases, you will need to withdraw a larger amount next year. (Even if your account balance remains stable, you will need to withdraw more because your life expectancy factor will be lower.) The extra income could increase not only the amount you pay in income taxes, but also your health insurance premiums down the line. .
“Some of the old rules of thumb, like you should let your tax-deferred accounts marinate for as long as possible, don’t always apply,” said Josh Strange, certified financial planner and president of Good Life Financial Advisors at NOVA in Alexandria. , Goes.
Without a crystal ball showing how the markets will behave this year, it is impossible to say whether the current 72-year-old could benefit from deferring their RMD for a year, all other factors being equal. (Market participants polled by Barron’s expected the S&P 500 to end the year above its current level). But what if all other factors are not equal? Suppose you are 72 years old, expect to retire this year, and are in a lower tax bracket next year. In this case, deferring your RMD to 2024 would probably make sense. On the other hand, if you’re planning on selling your primary residence next year and realizing over $250,000 in capital gains (or $500,000 if you’re married and filing jointly), you might want to be starting your RMDs this year to avoid a possible larger RMD being added to the following year’s income with your capital gains. This could trigger higher health insurance premiums for you down the line.
Rather than waiting until you’re about to have RMDs to do tax planning, you’ll have a better opportunity to manage the tax consequences if you start years in advance. “The sooner the better,” said Kris Yamano, a partner at Crewe Advisors in Scottsdale, Arizona. A popular move is to perform a Roth conversion after you retire but before reaching 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 spread out over a few years – will mean you owe less tax on the converted amount than if you did when you were in a higher bracket.
There could also be an advantage in withdrawing from your retirement accounts before you plan. For example, if making withdrawals earlier would allow you to defer applying for Social Security until age 70 to receive your full benefits, it may be worth considering. Laurence Kotlikoff, a Boston University economics professor who sells Social Security optimization software, presented a 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 they were 75 to get their RMD. Using his MaxiFi software, he found that waiting until age 75 would be less tax-efficient for this couple than starting smooth withdrawals at age 64, since their lower state taxes New York City and Medicare premiums would exceed the increase in federal taxes they owed from the earlier withdrawals.
“It’s a very complex calculation,” Kotlikoff said. “It’s really very individual.”
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