President Joe Biden signed legislation last month that pushes the age retirees must start taking required minimum distributions (RMDs) from IRAs, 401(k)s, and 403(b) plans, to 73 this year (up from 72). And, the age will actually bump up even higher to age 75 in 2033. Does that make you feel more secure?
People typically like the idea of putting off RMDs to get tax-deferred growth as long as possible. But, maybe that’s what the green eye shades in Washington want you to believe.
Putting off the time you begin withdrawals may NOT be so good. The more you delay the retirement age, the greater your RMD will likely have to be. You see, your RMD is calculated by dividing your tax-deferred retirement account balance as of December 31st of the preceding year by a life expectancy factor that corresponds to your age in the IRS Uniform Lifetime Table.
Put simply, as your life expectancy goes down, the percentage of assets that must be withdrawn goes up.
Higher RMDs later just might force you into a higher tax bracket – don’t forget, current tax brackets sunset in 2025, so tax brackets will be higher in just three years even if Congress does nothing.
More stealth? If you have higher taxable income, it may affect the taxation of your Social Security benefits, as well as your Medicare premiums for Part B (based on modified adjusted gross income) – even without the current tax law expiring.
There are many people who don’t need the money think they’re saving something by putting off RMDs as long as possible; but, they may end up paying more – in more than one way.
Oh, yes, your heirs may take a hit, too. The new SECURE Act 2.0 requires that most non-spouse beneficiaries to empty out their inherited IRAs within ten years… which may be when they’re in their highest earning years anyway.
The SECURE Act 2.0 may do a lot to help secure Uncle Sam, but I’m not so sure about the rest of us. Roth conversions – paying taxes now while they’re on sale – may be worth considering more now than ever.