Like many of the topics that comprise financial affairs, there have been notable changes that went into effect recently that could alter your estate and retirement planning. The SECURE 2.0 Act, signed last month, included several dozen changes relating to tax-advantaged retirement accounts. One such change, which went into effect on January 1st, delays the RMD age until 73 for when account holders are required to begin taking the minimum distributions in their 401(k) or IRA accounts.
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Overview Of RMDs
Tax-deferred accounts, such as your 401(k) or traditional IRA, do not require you to pay taxes upfront; they only incur taxes when you begin taking distributions in retirement. This is a good thing if you are in a lower tax bracket in retirement.
The IRS imposes RMDs (required minimum distributions), so the money can still be taxed. Prior to the beginning of 2023, you were required to take RMDs following the year that you turn 72 or 70 1/2, depending on whether or not you were born before or after July 1st, 1949.
2023 Changes To RMDs
The age you are required to begin taking RMDs increased to 73 at the beginning of 2023. For retirees who are turning 73 in 2023, you will have until April of 2024 to make your first withdrawal. Those turning 72 in 2023 have until April of 2025 to make theirs.
The SECURE Act also laid the groundwork for future changes to RMD withdrawals. It stated that the age will rise again in 2029 to 74, and rises once again in 2033 to age 75.
All of these changes, some immediate and others not going into effect until a decade later, may have notable effects on your retirement and estate plan. These changes may force you to make important decisions regarding your plan and whether or not you need to make a change. Regular check-ups on your estate and retirement plans are highly recommended, as they are crucial to sound financial planning, and may potentially prevent legal issues for your beneficiaries down the road.
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What To Consider
For those looking to take advantage of the SECURE Act 2.0 provisions by delaying RMDs, they should be aware that this could mean having to withdraw a substantially larger amount later on, as well as having to pay even more in taxes whenever you do begin taking your RMDs.
This is due to the fact that if your tax-deferred accounts continue growing, you will have less years to complete your RMD withdrawals. Of course, this means that your withdrawal amount later on will need to be much higher. A substantial increase in your withdrawals could also potentially increase your Medicare premiums.
The new changes may also potentially affect your beneficiaries. Suppose you were to delay your RMDs as long as possible in the hopes that the amount to be transferred is even greater than under the previous rules prior to the change. In that case, your beneficiaries would have 10 years to take their money after you pass away. This is provided that the death occurs after 2019, and if you are reading this, then it’s safe to assume you’ll check that box.
The elimination of the stretch IRA means that any non-spousal beneficiaries could potentially face larger required withdrawals. This is especially true for those who are in higher tax brackets.
Bottom Line
The SECURE 2.0 Act introduced many changes. Amongst those changes, there is the opportunity to allow your tax-deferred accounts more time to continue growing tax-free before you have to begin taking withdrawals and be subject to taxation on them. The Act also set the groundwork for future changes to the RMD withdrawal age, citing 2029 and 2033 as years that the required withdrawal age will be increased.
These new changes may have significant effects on your estate and retirement plan, as well as our overall financial plan. It’s important to understand the potential tax consequences of these changes and how they may affect your current strategy. These changes may warrant a meeting with your financial planner or estate planning attorney to see if you need to adjust anything about your current strategy.
As San Antonio, TX, financial advisors, the professionals at PAX specialize in estate and retirement planning, as well as investment management. Contact us today to see how we can optimize your current strategy.
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