IRAs and 401(k)s Are Nice Now, But Will RMDs Hamper Your Retirement? – Kiplinger’s Personal Finance

Most people are conditioned throughout their working lives to save as much as possible for retirement and to be prudent investors.

Unfortunately, most people mindlessly put money in tax-deferred retirement accounts, such as traditional IRAs or their employer-sponsored 401(k)s. That approach helps them save on taxes during their working life, and it’s an effective way to build savings. But it’s not in their best interests, as they reach their 50s and 60s, to keep contributing money willy-nilly  to their IRAs and 401(k)s.

Why? Because of the tax ramifications in retirement and required minimum distributions (RMDs). It’s critical that, well ahead of retirement, people take a look at strategies that will reduce their tax burden in retirement. Because it’s not about all the money you make in your working lifetime, but about how much you get to keep.

Defusing your RMDs with a Roth

RMDs can be a ticking time bomb for some people in retirement. They are required of the many retirees — even if they don’t need the money at the time — who have a traditional IRA or 401(k) and those with other qualified plans, such as a 457(b), 403(b) or Simplified Employee Pension (SEP) IRA. Some people, when looking ahead toward retirement, think they’ll be in a lower tax bracket, but RMDs, especially when added to Social Security payments and other income, may actually put them in a higher one.

The SECURE Act of 2019 raised the required age to start taking RMDs to 72 from 70½; people with any of the aforementioned accounts must begin withdrawing money from their retirement account by April 1 of the year after they turn 72. In subsequent years, they must withdraw the RMD by Dec. 31, based on the RMD calculation. Not taking one’s RMD results in a penalty of 50% of the RMD amount that year.

But making contributions to a Roth IRA or Roth 401(k) or doing systematic, year-by-year conversions to a Roth from your current tax-deferred retirement accounts are effective ways to generate tax-free income in retirement and lessen — perhaps significantly — your tax burden in those golden years. With a Roth, you pay taxes upfront each year when contributing to the account, but investment growth and account withdrawals in retirement are tax-free (as long as you are 59½ or older and have owned the Roth account for at least five years). That’s a major difference from traditional pre-tax savings accounts, such as your basic 401(k) or IRA, where you get a tax break each year for your contributions but pay taxes later when you start withdrawing funds in retirement.

Beyond the tax savings of a Roth on the back end, in retirement, there are other benefits. …….


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