The Safe 2.0 Law gives savers age 72 and under an extra year before you have to withdraw money from your retirement account. But just because you can defer your required minimum distribution (RMD) doesn’t mean you necessarily should, financial advisors say.
The sweeping pension law, passed late last year, raised the age for RMDs from 72 to 73 in 2023. From 2033, the RMD age will rise to 75.
The changes most directly affect those turning 72 this year, who would otherwise have had to take their RMD before April 1, 2024. years, RMDs must be taken at the end of the year.) Your RMD is calculated by dividing your retirement account balance as of December 31 of the previous year by what the IRS calls your “life expectancy factor.” The resulting amount is counted as income; you have to take it out of your account and you owe 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, as they need withdrawals from their retirement accounts to live on. But among those who can afford to wait, procrastination isn’t always the best move. If you defer your RMD and your retirement account balance increases, you’ll need to withdraw a larger amount next year. (Even if your account balance stays the same, you’ll have to withdraw more because your life expectancy factor will be lower.) The extra income can not only increase the amount you pay in income taxes, but also your Medicare premiums along the line.
“Some of the old rules of thumb, like letting your tax-deferred accounts marinate for as long as possible, don’t always apply,” says Josh Strange, a certified financial planner and president of Good Life Financial Advisors of NOVA in Alexandria. , va.
Without a crystal ball showing how markets will perform this year, it’s impossible to say whether today’s 72-year-olds could benefit from delaying their RMDs by a year, all other factors being equal. (Market participants surveyed by Barron’s expected the S&P 500 to end the year higher than current levels). But what if all other factors are not equal? Say you’re 72, expect to retire this year and fall into a lower tax bracket next year. In that case, it’s probably wise to postpone your RMD to 2024. On the other hand, if you plan to sell your primary residence next year and realize more than $250,000 in capital gains (or $500,000 if you have a married couple together). apply), you may want to start your RMDs this year to allow a potentially larger RMD to be added to next year’s income along with your capital gains. That could cause higher Medicare premiums for you later on.
Rather than waiting until you’re on the brink 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,” says Kris Yamano, a partner at Crewe Advisors in Scottsdale, Ariz. A popular move is to do a Roth conversion after you retire but before you reach RMD age. You’ll likely fall into a lower tax bracket during that time, so converting your traditional IRA to a Roth IRA — all at once or spread over a few years — means you owe less tax on the converted amount than if you did it when you were in a higher bracket.
It can also be an advantage to waive your retirement account earlier than planned. For example, if you could take withdrawals earlier, you can delay claiming Social Security until age 70 to receive your full benefit, then that might be worth considering. Laurence Kotlikoff, an economics professor at Boston University who sells Social Security optimization software, ran a screenplay of a hypothetical high-earning couple in their early sixties who planned to retire and claim Social Security at age 64. Using his software MaxiFi, he found that waiting until age 75 would be less tax-advantaged for this couple than starting smooth withdrawals at age 64, as their reduction in New York state taxes and Medicare premiums offset the increase in federal taxes they owed from the earlier withdrawals.
“This is a very complex calculation,” Kotlikoff said. “It’s really very individual specific.”
Write to Elizabeth O’Brien [email protected]