Security 2.0 allows retirees to defer RMD. That doesn’t mean they should.
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The Privacy Act 2.0 give savers 72 years of age or younger an extra year before you have to withdraw money from your retirement account. But just because you can postpone the required minimum distribution (RMD) doesn’t mean you necessarily have to, financial advisors say.
Passed late last year, the sweeping retirement law raised the age of RMDs to 73 in 2023, up from 72. Starting in 2033, the age of RMDs will rise to 75.
These changes affect most immediately those turning 72 this year, who should have taken their RMD by April 1, 2024. (Internal Revenue Service gives first-timers a grace period. due until the spring of next year; year, the RMD 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 by what the IRS calls is your “longevity factor”. The proceeds are counted as income; you have to withdraw money from your account and you will owe tax on it. The 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 periods, as they need to withdraw money from their retirement accounts to live on. But for those who have the ability to wait, procrastination is not always the best course of action. If you delay your RMD and your retirement account balance grows, you will have to withdraw a larger amount next year. (Even if your account balance doesn’t change, you’ll have to withdraw more because your life multiplier will be lower.) Extra income can increase more than just what you pay in income taxes. enter but also your Medicare premium down the line.
“Some old rules of thumb, such as you should leave accounts tax-deferred,” says Josh Strange, a certified financial planner and president of NOVA’s Good Life Financial Advisors in Alexandria. as long as possible, not always applicable. , V.
There is no crystal ball to show how the market will perform this year, It is impossible to say whether current 72 year olds could benefit from delaying their RMD by a year, all factors other factors are equal. (Market participants polled by Barron’s expect the S&P 500 to end the year higher than it is now). But what if all other factors are not equal? Let’s say you’re 72 years old, expect 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 next year and receive more than $250,000 in capital gains (or $500,000 if you’re married filing jointly), then you may want to start your RMD. this year to avoid a possibly larger RMD added to next year’s earnings along with your capital gains. That could trigger higher Medicare premiums for you later on.
Instead of waiting until you’re about to hit your RMDs to plan your taxes, 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 common move is to do a Roth transition after you retire but before you reach the age of RMD. You’ll likely be in a lower tax bracket during that time, so converting your Traditional IRA into a Roth IRA—all at once or alternating over a few years—means you’ll owe taxes. less on the converted amount than if you did it when you were in a higher bracket.
It can also be beneficial to withdraw money from your retirement account before you plan. For example, if an earlier withdrawal would allow you to defer Social Security claims until age 70 to receive your full benefits, that might be worth considering. Laurence Kotlikoff, professor of economics at Boston University who sells Social Security optimization software, run a script about a hypothetical high-income couple in their early 60s who plan to retire and claim Social Security at age 64. The couple lives in New York and plans to wait until age 75 to receive their RMD. Using his MaxiFi software, he found that waiting until age 75 was less tax-efficient for this couple than starting a smooth withdrawal at age 64, because of their state tax relief. New York and Medicare premiums will exceed the federal tax increase they owe from previous withdrawals.
“This is a very complicated calculation,” says Kotlikoff. “It’s really very individual-specific.”
Write to Elizabeth O’Brien at [email protected]