The SECURE 2.0 bill, signed by President Biden in December 2022, includes dozens of provisional changes related to tax-advantaged retirement accounts. One of the most significant changes is a provision, which went into effect January 1 this year, that defers until age 73 when account holders must begin taking required minimum distributions (RMDs) from their 401(k) or IRA. The law also provides for more RMD delays over the next 10 years.
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What are RMDs?
You don’t pay taxes on the money in your IRA or 401(k) when you put it in, which is why these accounts are considered tax-advantaged retirement accounts. Instead, you pay taxes when you withdraw the money in retirement. The money will be taxed at retirement according to your current tax bracket. This is beneficial if you’re in a lower tax bracket after retirement than when you first earned the money.
If you left all of your money in your IRA, it would eventually qualify to be passed down as an inheritance and might end up untaxed, something the Internal Revenue Service (IRS) makes sure doesn’t happen. The RMD forces you to withdraw some money while it is still taxable.
Before the SECURE 2.0 Act, or the Securing a Strong Retirement Act, was signed into law, you had to take RMDs after the year you turn 72 or age 70.5 if you were born before July 1, 1949.
What Washington has changed about RMDs
As of January 1, 2023, the age at which you must start using RMDs has been raised. The newly passed law states that if you turn 72 in 2023, you now have until April 2025 to make your first withdrawal. If you turn 73 in 2023, you have April 2024 to withdraw money from your account. The law also stipulates that the age will rise to 74 in 2029 and rise to 75 from 2033.
These changes apply to different accounts:
Caution is advised
Taking advantage of SECURE 2.0 Act provisions to defer RMDs may mean you have to withdraw a larger amount later and possibly pay more taxes when you start your RMDs. That’s because if your account balance has continued to grow, you’ll likely have fewer years to complete your withdrawals, and that in turn means withdrawals would be higher later on. In addition, larger withdrawals can increase your Medicare premiums.
The new provisions may also affect non-marital beneficiaries aged 18 or over. By delaying RMDs as long as possible so that the amount to be transferred is greater than under the previous rules, beneficiaries would have 10 years to withdraw their funds after the original account holder dies, provided the death occurs after 2019 In other words, non-spouse beneficiaries may face larger mandatory withdrawals, especially if they fall into high tax brackets.
It boils down
The SECURE 2.0 Act gives your tax-advantaged account more time to grow tax-free before you have to withdraw money and thus pay taxes on that money. Furthermore, the law paves the way for more RMD delays in 2029 and 2033. Before you decide to take full advantage of the new provisions, think carefully about the tax implications. That’s especially true if your children who will inherit the bill could be forced to make such large distributions due to the 10-year timeframe that it will subject them to heavy taxes.
Tips about retirement
A financial advisor can provide insight and guidance as you make financial decisions during retirement or as you prepare for retirement. If you don’t already have a financial advisor, it shouldn’t be difficult to find one. SmartAsset’s free tool pairs you with up to three vetted financial advisors serving your area, and you can interview your advisor matches for free 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.
Use our free retirement calculator to get a quick estimate of what you’ll need to cover your expenses after you leave the workforce.
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