It took more than four decades for Congress to raise the age of minimum distributions required in 2019 from 70 and a half to 72. Less than two years later, Congress plans to raise it again.
The Setting Every Community Up for Retirement Enhancement Act of 2019 had bipartisan support, and experts believe that congressional recall, the Securing a Strong Retirement Act – already approved by the House Ways and Means Committee – has a good chance of becoming a law. Called SECURE Act 2.0, the bill aims to make it easier for Americans to save for retirement by raising the RMD age to 73 on January 1, 2022; to 74 on January 1, 2029; then at 75 on January 1, 2032.
Having three more years of tax-deferred growth in your retirement savings accounts, however, is a mixed bag. “Everyone loves it when you delay RMDs,” says Ed Slott, president of Ed Slott and Co., which offers IRA training for financial advisors. “But giving up on RMD or postponing it doesn’t help most people.”
In fact, taking RMD later could hurt. The amount of these required withdrawals from traditional IRAs and 401 (k) is based on both the account balance at the end of each year and the life expectancy of the account owner as determined by the duration table. uniform living standards of the IRS. By delaying RMDs, retirees may be forced to make larger withdrawals from an account that may have a larger balance because it has had more time to grow. This may have tax implications.
Of course, raising the age of RMD is appropriate given today’s increasing life expectancy. In the mid-1970s, when the Employee Retirement Income Security Act, or ERISA, first authorized IRAs, life expectancy at birth in the United States was 72.6 years, according to the Centers for Disease Control and Prevention. By 2020, that age, according to the CDC, had risen to 77.3 years.
Raising the age of the RMD gives retirees more flexibility. If the law is changed, savers can still receive distributions before age 75 or, if they can afford it, leave the funds alone for a few more years. “It just gives you options but doesn’t force you to do something you don’t want to do,” says Catherine Reilly, director of retirement solutions at Smart USA, a pension provider.
The delay also gives people more time to convert a traditional IRA to a Roth before the RMDs take effect, which can have tax advantages. (You can still convert to Roth after you start receiving distributions, but before converting you need to take your RMD for that year.) Roth IRAs don’t have RMDs, and because the accounts are funded with dollars after tax, retirement withdrawals are tax free.
For most seniors, however, the bill is unlikely to matter. The Treasury Department estimated in 2019 that 20.5% of seniors required to take RMD would only withdraw the minimum amount in 2021. This implies that most people taking RMD need the money for their living expenses. subsistence and are unlikely to delay distributions if given the choice. “For the majority of retirees, it will be a non-event if [Congress] pushing back the age, ”said Paul Camhi, vice president of investment advisory firm The Wealth Alliance. “Most can’t afford to wait until 72, let alone 75.
If you can afford to wait, be prepared for a tax hit. Since RMD is taxed as income, taking a larger amount later could push you into a higher tax bracket. As a result, a larger portion of your Social Security benefits may be taxed, or you could lose some deductions and credits if higher RMDs push you past the income requirements. Even the health insurance premiums for Parts B and D, which are income-based, could be higher. “There are ripple effects in having more income,” Slott says.
Whatever happens, don’t assume that waiting around to take RMD is always better. Instead, calculate how your RMDs would change if you took them later. “Try to withdraw the money at the lowest tax rate possible,” Slott says. “That may mean spreading out RMD over several years to stay in a lower tax bracket. Pushing it down to 75 may not do you a favor in the long run.”