the Lockdown 2.0 Code It gives savers 72 and less than an extra year before you have to withdraw money from your retirement accounts. But just because you can defer a required minimum distribution (RMD) doesn’t necessarily mean you should, financial advisors say.
The Universal Retirement Act was passed late last year, raising the age of an RMD to 73 in 2023, from 72. Starting in 2033, the age for an RMD will rise to 75.
The changes directly affect those turning 72 this year, who would have been required to obtain an RMD by April 1, 2024. (The Internal Revenue Service first granted a grace period until the spring of the following year; in all subsequent years, it must be taken RMDs by 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 the “life expectancy factor.” The resulting amount is counted as income; You have to withdraw it from your account and you will 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, because they need withdrawals from their retirement accounts to live. But among those who can wait, postponing isn’t always the best move. If you delay your RMD and your retirement account balance increases, you’ll have to withdraw a larger amount next year. (Even if your account balance remains stable, you’ll have to take out more because your life expectancy factor will be lower.) The extra income can increase not only the amount you pay in income taxes, but also Your Medicare premiums underline.
“Some of the old ground rules, like allowing your tax-deferring accounts to wane for as long as possible, don’t always apply,” said Josh Strange, certified financial planner and president of Good Life Financial Advisors of NOVA, Alexandria. , Virginia.
Without a crystal ball showing how markets have fared this year, it’s impossible to say whether 72-year-olds would benefit from postponing RMDs annually, all other factors being equal. (Market participants were surveyed by Barron’s (S&P 500 expected to end the year higher than its current level). But what if all other factors are not equal? Let’s say you turn 72, expect to retire this year, and be in a lower tax bracket next year. In that case, deferring your RMD to 2024 probably makes sense. On the flip side, if you plan to sell your primary residence next year and make more than $250,000 in capital gains (or $500,000 if you’re married filing jointly), you may want to start your RMD this year to avoid possibly adding an RMD. Bigger to next year’s income along with your capital gains. This can increase your Medicare premiums for you in the future.
Instead of waiting until you’re on the cusp of RMDs to do your tax planning, you’ll have a better chance of managing the tax consequences if you start years in advance. “The earlier, the better,” said Chris Yamano, partner at Crewe Advisors in Scottsdale, Arizona. A common step is to make a Roth conversion after retirement but before you reach RMD age. You’ll likely be in a lower tax bracket during that time, so converting your Traditional IRA into a Roth IRA — either all at once or staggered across a few years — means you’ll owe less taxes on the amount transferred than if you did it when you were in a higher bracket.
There may also be a benefit to withdrawing from your retirement accounts before you plan to. For example, if taking withdrawals early would allow you to delay claiming Social Security until age 70 to receive your full benefits, this might be worth considering. Lawrence Kotlikoff, a professor of economics at Boston University who sells Social Security optimization software, Script ran For a putative 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 were planning to wait until 75 to take an RMD. Using his MaxiFi software, he found that waiting until age 75 would be less tax efficient for this couple than initiating smooth withdrawals at age 64, since their reduction in New York state taxes and health insurance premiums would outpace the increase in federal taxes they owe from previous withdrawals.
“This is a very complex arithmetic,” Kotlikov said. “It’s really very specific to the individual.”
Write to Elizabeth O’Brien at [email protected]
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