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It’s worth doing the math to determine whether taking RMDs sooner can ease your tax bill.
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The Secure 2.0 Act gives savers age 72 and younger an extra year before you have to withdraw money from your retirement accounts. But just because you can defer your minimum required distribution (RMD) doesn’t necessarily mean you should, financial advisers say.
Passed late last year, the broad pension law raised the age of RMDs to 73 in 2023, up from age 72. From 2033, the age of RMD will increase to 75.
The changes most immediately affect those who turn 72 this year, who would otherwise be required to file the RMD by April 1, 2024. (The Internal Revenue Service gives newcomers a grace period until the spring of the following year; in each year, RMDs must be earned 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 accounted for as revenue; you must withdraw it from your account and you must 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 cannot afford to wait as they need withdrawals from their retirement accounts to survive. But among those who can wait, delaying is not always the best move. If you fall behind on your RMD and your retirement account balance increases, you will have to withdraw a larger amount next year. (Even if your account balance remains stable, you’ll have to withdraw more, as the life expectancy factor will be lower.) The extra income can increase not only the amount you pay in income taxes, but also your premiums. Medicare in the future. .
“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 president of NOVA’s Good Life Financial Advisors in Alexandria. , Go.
Without a crystal ball showing how the markets will behave this year, it’s impossible to say whether the current 72-year-olds might benefit from deferring their RMDs a year, all other factors being equal. (Market participants surveyed by Barron’s expected the S&P 500 to end the year higher than its current level.) But what if all other factors are not equal? Let’s say you’re 72 years old, expect to retire this year, and are in a lower tax bracket next year. In that case, deferring your RMD to 2024 would likely make sense. On the other hand, 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 might want to start your RMDs this year to avoid a possibly larger RMD being added to next year’s income along with your capital gains. This can trigger higher Medicare premiums for you in the future.
Rather than waiting until you’re on the brink of RMDs to do your tax planning, you’ll have a better opportunity to manage the tax consequences if you start years in advance. “The sooner the better,” said Kris Yamano, a partner at Crewe Advisors in Scottsdale, Arizona. A popular move is to do a Roth conversion after retiring but before reaching RMD age. You’ll likely be in a lower tax bracket during this time, so converting your traditional IRA to a Roth IRA – either at once or spread over a few years – will mean you owe less tax on the converted amount than if you did. when it was in a higher key.
There may also be a benefit to withdrawing from your retirement accounts earlier than planned. For example, if making early withdrawals would allow you to defer claiming Social Security until age 70 to receive your full benefit, then this is worth considering. Laurence Kotlikoff, a Boston University economics professor who sells Social Security optimization software, presented the scenario of a hypothetical high-income couple in their 60s who planned to retire and claim Social Security at age 64. The couple lived in New York and planned to wait until 75 to take their RMDs. Using his MaxiFi software, he found that waiting until age 75 would be less tax efficient for this couple than initiating soft withdrawals at age 64, since the reduction in New York state taxes and Medicare premiums would exceed the increase in federal taxes owed by the government. previous withdrawals.
“This is a very complex calculation,” Kotlikoff said. “It’s really very specific to each individual.”
Write to Elizabeth O’Brien at elizabeth.obrien@barrons.com
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