The Secure 2.0 Act giving savers 72 and less than an additional year before withdrawing money from your retirement accounts. Financial advisors say that just because you can defer required minimum distributions (RMDs) doesn’t mean you necessarily should.
A sweeping retirement law passed late last year raised the RMD age from 72 to 73 in 2023. Starting in 2033, the RMD age will increase to 75.
The changes most affect those turning 72 this year who would otherwise be required to take RMDs by April 1, 2024. (The Internal Revenue Service gives first-time filers a grace period until the spring of the following year; for all subsequent years, RMDs must be taken by the end of the year.) Your RMD is calculated by dividing your retirement account balance as of December. 31 of the previous year with what the IRS calls your “life expectancy factor.” The resulting amount is calculated as income; you have to withdraw it from your account and you will owe 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 because they need to withdraw money from their retirement accounts to survive. But among those who can afford to wait, procrastination isn’t always the best move. If you delay your RMD and your retirement account balance grows, you’ll have to withdraw a larger amount the following year. (Even if your account balance stays flat, you’ll have to withdraw more because your life expectancy will be lower.) Additional income can increase not only the amount you pay in income taxes, but also the amount you pay. Your Medicare premiums down the line.
“Some of the old rules, like letting your tax-deferred accounts marinate as long as possible, don’t always apply,” says Josh Strange, a certified financial planner and president of NOVA’s Good Life Financial Advisors in Alexandria. , Go.
Without a crystal ball showing how the markets will perform this year, it’s impossible to say whether, all other factors being equal, current 72-year-olds might benefit from deferring their annual RMDs. (Market participants surveyed by Barron’s expected the S&P 500 to end the year higher than its current level). But what if all other factors are equal? Say you’re 72, expect to retire this year, and be in a lower tax bracket next year. In that case, it would probably make sense for you to defer your RMD until 2024. On the other hand, if you plan to sell your primary residence next year and have a capital gain of more than $250,000 (or $500,000 if you’re married), then you may want to start taking RMDs this year. A larger RMD can be added to next year’s income along with your capital gain. This could lead to higher Medicare premiums for you.
Instead of 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 in advance. “The sooner the better,” said Chris Yamano, a partner at Crewe Advisors in Scottsdale, Ariz. One popular move is to do a Roth conversion after retirement but before reaching RMD age. You’ll likely be in a lower tax bracket during that time, so converting a traditional IRA to a Roth IRA all at once or gradually over several years will mean you’ll owe less tax on the converted amount. you did when you were in a higher bracket.
It can also be beneficial to withdraw from your retirement accounts before planning. For example, if taking out earlier allows you to delay claiming Social Security until age 70 to get full benefits, it’s worth considering. Laurence Kotlikoff, an economics professor at Boston University who sells software to optimize Social Security, He executed the script A hypothetical high-earning couple who plans to retire in their early 60s and claim Social Security at age 64. The couple lived in New York and planned to wait until 75 to take RMDs. Using MaxiFi software, he found that waiting until 75 would be less tax-efficient for this couple than starting smooth withdrawals at age 64, because the reduction in their New York state taxes and Medicare premiums would outweigh the increase in federal taxes. previous withdrawals.
“It’s a very complicated calculation,” Kotlikoff said. “It’s really a very personal trait.”
Write to Elizabeth O’Brien email@example.com
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