Wealthy retirees seem to have scored big in Congress’ year-end spending agenda.
Legislation signed by President Joe Biden last week includes pension plan changes that will push back the age at which people are required to begin withdrawing from their IRAs and 401(k)s to 73 next year, up from 72 currently, and will extend it to 75. 2033.
It’s a godsend for those who don’t need the money (retirement giant Vanguard estimates that about 25% of its customers don’t withdraw money from retirement accounts until they’re there.) not forced), because each additional year allows these investments to continue to raise taxes. free.
But just because you can delay doesn’t mean you have to. If you’re lucky enough not to need money from your retirement accounts for living expenses, you should still weigh the implications for your taxes, heirs and Health insurance premiums before deciding to wait for the deadline.
The amount the Internal Revenue Service asks you to withdraw each year is based on account balances and age. Delaying will likely lead to larger required withdrawals and potentially greater tax consequences when you finally start withdrawing money. (If you have a 401(k), make sure you know what your own plan requires, as employers may have different guidelines for distribution.)
For example, the IRS would require a 72-year-old man with a $1 million retirement plan to receive a distribution of approximately $36,500 this year. Delaying the withdrawal would allow that money to stay invested and grow. But that probably means a higher account balance in future years and fewer years to spread it out – so the required minimum distribution later on would be higher.
And since these distributions are considered income, they will affect the amount you pay in health insurance premiums, which could increase your insurance costs each year.
If you think about your heirs, they could be even worse off tax-wise if you delay your distributions too long. Under 2019 changes, non-spouse beneficiaries – i.e. children over the age of 18 – who inherit retirement accounts must empty them within 10 years of the death of the original holder. of the account (for deaths after 2019).
This could mean larger distributions for your children down the line, possibly hitting them in their best-earning years, when they would face the highest tax rates.
“It’s ‘The Great Fiscal Crisis,'” says Jeff Levine, chartered accountant and financial planner at Buckingham Wealth Partners. “Fewer years of forced distributions plus fewer years of possible distributions means that it is possible for a lot more income to be squeezed into a much smaller number of years.”
The question deserves careful consideration. There had been some confusion since the 2019 change as to whether beneficiaries should receive regular distributions in each of the 10 years following the death of the account holder, or simply ensure to drain them within the window of 10 years. The IRS proposed rules in February that required annual withdrawals by heirs if the original owner had died after the required start date for distributions.
Given the confusion, the agency said it would not start imposing penalties until 2023 for heirs who fail to take annual withdrawals under the new rule. And now, thanks to changes in the current year-end bill, the penalties have been reduced. Amounts not withdrawn as needed will be subject to a tax of 25% – half of what it was before – and as little as 10% if the withdrawal is made early enough.
If delaying distributions still seems like the way to go, wealthy savers could use the extra time given to them to convert part of an IRA to a Roth IRA, says IRA accountant Ed Slott.
With a Roth IRA, you pay taxes up front and enjoy tax-free withdrawals after age 59½, as long as the money has been in the account for at least five years. Converting to a Roth IRA is often best suited for people in their early 70s when income is relatively low (therefore the tax rate applied to the conversion amount is lower) and the required minimum distributions have not yet begun (to avoid having to pay tax on the distribution at the same time you pay tax on a conversion.)
With Roth IRAs, account holders aren’t subject to the required minimum distributions for that money, so it can continue to grow for their heirs. A Roth IRA is also generally more beneficial to heirs because they don’t have to pay taxes on withdrawals if the money has been in the account for five years.
So, yes, the government’s new spending program has some potential benefits for wealthy retirees, but they’re not without potential trade-offs. Thinking from all angles will help you make the decision that’s best for you.
By Alexis Leondis, Bloomberg Opinion columnist covering personal finance. Previously, she oversaw tax coverage for Bloomberg News. This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.
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