Conventional logic says you should delay withdrawals from your tax-deferred retirement accounts as long as possible to maximize the tax-free compounding that can increase the size of your overall nest egg. But the IRS won’t wait forever to get its tax bite, which is why the law insists that you make required minimum withdrawals (RMDs) after a certain age. That age has now been delayed with the SECURE 2.0 Act. Here’s how it could affect your retirement planning.
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New RMD Requirements Under SECURE 2.0
The SECURE 2.0 Act has pushed RMDs back from age 72 to age 73 in 2023 (and age 75 in 2033). But while it’s nice to have the option to wait, there’s just one question: Should you?
Your answer will depend on your personal situation, including tax considerations and even when to begin collecting your Social Security benefits.
Anyone with a traditional Individual Retirement Account, 401(k) or similar workplace plan is required to start taking RMDs based on the life expectancy of the account holder and any spouse. If you don’t the IRS could hit you with a penalty of 50% of the required withdrawal amount. That penalty now drops to 25%, or 10% if you manage to take the past-due RMD by the end of the second year following the year it was due.
If you have a Roth 401(k), you can start ignoring that rule in 2024, when those accounts will no longer be subject to RMDs. (There’s an exception for RMDs required before 2024 that don’t need to be taken until Jan. 1, 2024, so check with your tax advisor).
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3 Times When It Doesn’t Pay to Delay Your RMD
Whatever the rules, there are times when you may not want to delay withdrawals from those tax-deferred accounts before you hit the RMD deadline. If you expect to be in a higher tax bracket the following year, you can take a withdrawal now to lessen the tax bite. If that leaves your balance lower for the next year, your tax hit also may be reduced. If your tax bracket drops in the following year then it can make sense to delay your RMD until then.
You also might want to take money out sooner than required if you’re expecting a large windfall in the future. If the sale of a business, property or other taxable asset is going to produce a significant amount of capital gains, reducing the size of your retirement account early takes some of that money out of next year’s tax equation.
Another consideration is whether you’re collecting Social Security benefits and whether your eventual RMDs will cause your benefits to be taxed. If your adjusted gross income is more than $25,000 for single filers ($32,000 for joint filers), your Social Security payments can be taxable. If an eventual RMD will trigger that tax, an earlier withdrawal from your retirement account may be in order.
Weighing all the considerations that can come into play once you’re retired can be a complex decision that can vary widely for each individual and couple. Consulting with a tax expert before you face RMDs can give you time to plan the best withdrawal strategy.
The SECURE 2.0 Act delayed RMD age requirements from age 72 to 73 years old in 2023 (and age 75 in 2033). While pushing back your RMD can maximize tax-free compounding in your tax-deferred retirement accounts, there are times when a RMD can help minimize your tax liability. Before taking or delaying your RMD, consider how it will impact your overall financial plan.
Retirement Planning Tips
A financial advisor can help you figure out how delaying your RMD will impact your retirement plan. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
SmartAsset’s retirement savings calculator can help you estimate how much you need to set aside monthly or annually to reach your target retirement goals.
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