He Safe Act 2.0 gives savers age 72 and younger an extra year before they have to withdraw money from their retirement accounts. But just because you can postpone your required minimum distribution (RMD) doesn’t mean you necessarily should, financial advisers say.
Passed late last year, the sweeping retirement law raised the age for RMDs to 73 in 2023, from 72. Starting in 2033, the RMD age will increase to 75.
The changes most immediately affect those turning 72 this year, who would otherwise have had to take their RMD by April 1, 2024. (The Internal Revenue Service gives newbies a grace period until spring of the following year; in all subsequent years, RMDs must be taken before the end of the year). Your RMD is calculated by dividing your retirement account balance as of December 31. 31 of the prior year for what the IRS calls your “life expectancy factor.” The resulting amount is counted as income; you must withdraw it from your account and you must pay tax on it. RMD rules apply to traditional IRAs as well as employer-sponsored retirement plans like 401(k)s and 403(bs).
Most Americans can’t afford to wait, as they need withdrawals from their retirement accounts to live. 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 have to withdraw a larger amount next year. (Even if your account balance remains stable, you’ll have to take out more as your life expectancy factor will be lower.) The additional income could increase not only the amount you pay in income taxes, but also your Medicare premiums down the line.
“Some of the old rules of thumb, like letting your tax-deferred accounts sit in the marinade as long as possible, don’t always apply,” said Josh Strange, certified financial planner and president of NOVA’s Good Life Financial Advisors in Alexandria. ., goes.
Without a crystal ball showing how the markets will perform this year, it’s impossible to say whether today’s 72-year-olds could benefit from deferring their RMDs by one year, all other things being equal. (Market participants surveyed 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? Let’s say you’re 72, expecting to retire this year and be in a lower tax bracket next year. In that case, postponing your RMD to 2024 would probably make sense. On the other hand, if you plan to sell your primary residence in the next year and earn more than $250,000 in capital gains (or $500,000 if you’re married filing jointly), then you may want to start your RMDs this year to avoid a possible higher risk. RMD will be added to next year’s income along with your capital gains. That could trigger higher Medicare premiums for you in the future.
Rather than waiting until you’re on the cusp of RMDs to do tax planning, you’ll have a better chance of managing the tax consequences if you start years in advance. “The sooner the better,” said Kris Yamano, a partner at Crewe Advisors in Scottsdale, Arizona. One popular move is to do a Roth conversion after retiring but before reaching 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 spread over a few years, will mean you’ll owe less tax on the converted amount than if you you did it when you were at a higher level.
There could also be a benefit to withdrawing money from your retirement accounts earlier than planned. For example, if making early withdrawals would allow you to postpone applying for Social Security until age 70 to receive your full benefit, then it may be worth considering. Laurence Kotlikoff, a Boston University economics professor who sells Social Security optimization software, ran a stage from 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 take their RMDs. 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, as New York State tax cuts and Medicare premiums would exceed the increase in federal taxes they owed from the earlier withdrawals.
“This is a very complex calculation,” Kotlikoff said. “It’s really very specific to each individual.”
Write Elizabeth O’Brien at email@example.com
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