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It’s worth doing the math to determine whether taking RMDs earlier might ease your tax bill.
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The Safe 2.0 Act gives savers 72 and under an additional year before you must withdraw money from your retirement accounts. But just because you can defer your required minimum distribution (RMD) doesn’t mean you need to, financial advisors say.
Passed late last year, the Comprehensive Retirement Act raised the age for RMDs to 73 in 2023, from 72. Beginning in 2033, the RMD age will increase to 75.
The changes immediately affect those turning 72 this year, who would otherwise be required to take an RMD by April 1, 2024. 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 by what the IRS calls your “life expectancy factor.” The resulting amount is counted as income; You have to withdraw it from your account and you will pay 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 from their retirement accounts to survive. But among those who can afford to wait, delaying is not always the best move. If you delay your RMD and your retirement account balance increases, you’ll end up withdrawing a larger amount in the next year. (Even if your account balance stays flat, you’ll have to buy more because your life expectancy factor will be lower.) The extra income may increase not only the amount you pay in income taxes, but also your Medicare premiums are also below the line. .
“Some of the old rules of thumb, like you should let your tax-deferred accounts marinate as long as possible, don’t always apply,” said Josh Strange, a certified financial planner and director of NOVA in Alexandria. Director of Good Life Financial Advisors. , Va.
Without a crystal ball to show how the markets will perform this year, it’s impossible to say whether current 72-year-olds would benefit from delaying RMDs for a year, all other factors being equal. (Market participants polled by Barron’s expect the S&P 500 to finish the year higher than its current level). But what if all other factors are not equal? Say you’re 72, expect to retire this year, and be in a lower tax bracket next year. In this case, deferring your RMD to 2024 would probably make sense. On the other hand, if you plan to sell your primary residence in the next year and realize a capital gain of more than $250,000 (or $500,000 if you’re married filing jointly), you may want to take your RMDs this year. Start to avoid stopping. Potentially larger RMDs are added to your capital gains in the next year’s income. This can lead to higher medical premiums for you down the line.
Instead of waiting until you’re into 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,” said Chris Yamano, a partner at Crew Advisors in Scottsdale, Ariz. A popular move is to rollover a Roth after you retire but before you reach RMD age. You’ll probably be in a lower tax bracket during that time, so converting your traditional IRA to a Roth IRA — either all at once or staggered over several years — means you’ll pay less than the amount converted. Pay tax if you did it when you were in a higher bracket.
It may also be beneficial to withdraw from your retirement accounts before you start planning. For example, if taking an early withdrawal allows you to delay claiming Social Security until age 70 to receive your full benefit, that may be worth considering. Lawrence Kotlikoff, a Boston University economics professor who sells Social Security optimization software, created a scenario of a hypothetical high-income couple in their early 60s who plan to retire at age 64 and claim Social Security. had The couple lived in New York and planned. Wait until 75 to take your RMDs. Using his software MaxiFi, he found that waiting until 75 would be less tax-efficient for the couple than starting an easy withdrawal at age 64, because of the reduction in their New York state taxes and Medicare premiums would be more than the increase in federal taxes they owed. Previous withdrawal.
“It’s a very complicated calculation,” Kotlikoff said. “It’s really very individual specific.”
Write to Elizabeth Obrien at [email protected]
