Congress passed the SECURE 2.0 Act of 2022 with the intention of improving retirement savings options. But one of the law’s best features is delaying something that’s not optional and can complicate the financial picture in retirement — required minimum distributions (RMDs).
Thanks to the SECURE 2.0 Act, the age at which you must start taking RMDs from retirement accounts such as IRAs and 401(k)s has increased to 73 in 2023 for individuals who turned 72 after Dec. 31, 2022, or who will turn 72 before Jan. 1, 2033. The law increases the RMD age to 75 in 2033 for individuals turning 74 after Dec. 31, 2032. Under previous law, retirees had to begin taking RMDs at 72. (Also, if you turned 72 in 2022 or earlier, you will need to continue taking RMDs as scheduled.)
RMDs often pose problems for people in their financial planning. But these significant changes that increase the RMD age create planning opportunities. Some people now have an additional two or three years before RMDs take effect, giving them time to take advantage of certain opportunities, like stretching their tax bill or giving to charity in a more effective way. What are you going to do with this extra time?
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And in conjunction with RMD-related planning changes, it’s also wise to consider the tax context of the next couple of years and ways to plan accordingly. Large portions of the (TCJA) will expire by the end of 2025. So there are two more years to capitalize on historically low tax rates before they likely go back up in 2026.
Here are three key planning options to consider as a result of the SECURE 2.0 Act:
1. Qualified charitable distributions (QCDs)
This opportunity for a tax break is often overlooked. Despite the new mandatory RMD age being 73, you can still exercise a QCD as early as age 70½. QCDs are tax-free donations allowing you to withdraw money from IRAs and qualified accounts and distribute it to a qualified charity.
QCDs can count toward RMDs if certain conditions are met. Although the money is withdrawn from your IRA, it is not counted as taxable income the way regular withdrawals are. A QCD also can be deducted from your gross income on your tax return without having to itemize your deductions.
2. A coordinated Roth conversion plan
A Roth conversion gives you the ability to make tax-free withdrawals in retirement. If you’re going this route, you should know the answers to these questions:
- How much do you need to convert?
- How much is it going to cost tax-wise to convert in a given year?
- How much are you going to save in taxes in retirement?
Roth IRAs aren’t subject to taxes when you withdraw from them in retirement as long as you’ve held the account for at least five years. Roth IRAs also aren’t subject to RMDs for the owner during his or her lifetime, but the owner’s beneficiaries generally must take RMDs on a Roth IRA.
The amounts people may have thought they needed to convert have changed significantly because they’ve now got more years until they have to start taking RMDs. They can adjust the amount they’re converting year over year.
Again, it’s important to keep in mind that tax rates will remain low until the TCJA expires at the end of 2025. Therefore, some people may want to convert more money to a Roth this year and in each of the next two years before rates likely go up in 2026.
3. Accelerate distributions
In your pre-RMD years and once you reach 59½ years old, you have the flexibility to plan on a yearly basis how to minimize both your present and future taxes. In that context, you may want to accelerate your distributions from certain accounts sooner than you had previously planned.
Let’s say you have a large balance in a tax-deferred account, such as a 401(k) or traditional IRA — this means you’ll face high RMDs in the future. In that case, it would benefit you to withdraw those assets in the years leading up to your RMD age. While that move would give you some tax liability up front, you’re taking advantage of lower tax rates through 2025 and having more years to drain that bucket before your RMD kicks in. Most important, you’re reducing your tax liability at 73 or 75 by lowering the account balance.
Money buys many things, but one thing you can’t buy is time, which becomes even more precious in retirement. The SECURE 2.0 Act gives you valuable extra time to plan for those hard-earned, relaxing and enjoyable years, so use it wisely.
Dan Dunkin contributed to this article.
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