Who benefits if required retirement account withdrawals age is raised

Some future retirees will likely have more time to accumulate a pile of money that won’t be taxed when they or their heirs mine it.

According to a federal provision The pension bill passed the House of Representatives last monthRequired minimum distributions, or RMDs, from qualifying accounts will eventually begin at age 75, up from the current age of 72. RMD is the amount that must be withdrawn annually from most savings. Retirement savings — that is, 401(k) plans or individual retirement accounts — under federal law.

If the proposed RMD age change passes Congress, the benefits will go to those looking to transfer assets to a Roth IRA from traditional 401(k) plans or IRAs.

While tax applies to the amount converted, Roth accounts are RMD-free for the duration of the owner’s life, and qualified withdrawals will be tax-free – this is the exact opposite of packages 401(k) and Traditional IRAs.

“Let’s say in the past someone retired at 65 and had seven years to make a transition – they potentially had 10 years to make those transitions in a tax-friendly way,” the planner certified financier and CPA Jeffrey Levine, director of planning at Buckingham Wealth Partners in St. Louis.

“This is a boon for wealthy people who want to use their IRA as a wealth transfer account rather than a retirement account,” says Levine. “I don’t force them, but that’s the one who really benefits.”

RMD, which is determined by dividing your account balance by your lifespan (as defined by the IRS), can be a thorn in the side for those who don’t need the money. In other words, they have enough income coming from other sources and would rather let their investments continue to grow.

However, most account holders – 79.5%, according to the IRS – take more than their annual RMD.

Current law says you must take your first RMD the year you turn 72, although that first RMD may be delayed until April 1 of the following year. If you’re working and contributing to your company’s retirement plan, the RMD won’t apply to that particular account until you retire.

As mentioned, no RMD has a Roth IRA for the life of the account holder. However, for all legacy IRAsFor 401(k) plans or other qualified retirement accounts, the balance must be withdrawn in full within 10 years if the owner dies after 2019, unless the beneficiary is a spouse or individual other qualified personnel.

The bipartisan retirement bill cleared the House last month (HR 2954) and is awaiting Senate action called “Secure 2.0” and is intended to build on the original 2019 Privacy Act, which ushers in changes to enhance security in retirement. That measure raised the RMD age to 72 years from 70½.

The bill recently passed by the House of Commons would change as RMDs must start by raising the current age of 72 to 73 next year, then 74 in 2030 and 75 in 2033. The Senate RMD is a little different: It will simply raise the age to 75 by 2032. It will also waive the RMD for individuals with less than $100,000 in total retirement savings, as well as reduce penalties for not using RMD from 50% current down to 25%.

“Reducing the missed RMD penalty to 25% seems reasonable, since most errors are from [individuals] CFP Mark Wilson, president of MILE Wealth Management in Irvine, California.

The charts below illustrate how a theoretical $500,000 portfolio should perform over time, earning 5% annually at RMD 72 and 75. The difference at age 95 was $40,391 using a later RMD age.

For those taking advantage of the period from retirement to the age when RMD begins to convert a traditional 401(k) plan or IRA balance to a Roth IRA, be aware that there may be circumstances in which you want to Think again about that move.

“There are certainly a lot of people who use the 65-to-65th retirement period and their RMD years to make the transition because their tax rate is likely lower than they were when they were young,” says Levine. go to work.

For starters, if you plan on giving a lot to charity, you can leave that money in a traditional IRA. This is because when you reach age 72, you can donate money directly from your IRA to a charity – this amount can count towards your RMD for that year, up to $100,000 – and these so-called qualified charitable distributions do not count towards your taxable income.

“Charities don’t pay taxes to [donation]so it doesn’t make sense to do the rollover and you have to pay taxes,” Levine said, adding that the same goes for if your estate plan includes a direct IRA rollover to an nonprofit qualified profit.

Another situation where it may make sense to leave money in an IRA is if you are in a high income tax bracket but your beneficiaries are in a lower tax bracket. In other words, if you pay a higher percentage of the conversion than what your heirs will pay upon your death, leaving it in a traditional IRA and taxed at a lower rate can reasonable.

At the same time, however, keep in mind that many beneficiaries will only have 10 years to deplete the account.