Local Raymond James Financial Advisor Thomas F. Scanlon, CFP®, CPA of Manchester, CT quoted by MarketWatch on January 6, 2023.
First Published: Jan. 6, 2023 by Alessandra Malito for MarketWatch Live.
Those celebrating a 72nd birthday this year have more time before having to pull money from retirement accounts
Anyone turning 72 years old in 2023 is getting a birthday present from Congress – one more year to push back their required minimum distributions from their retirement accounts.
As part of the Secure Act 2.0, account holders subject to required minimum distributions now have until they turn 73 years old to take those withdrawals, up from 72. This gives anyone turning 72 this year who would have otherwise had to take an RMD one more year to take that withdrawal.
The RMD age will increase yet again, to 75 years old, in 2033 as part of the new law.
“It’s a great benefit,” said Timothy McGrath, a certified financial planner and managing partner of Riverpoint Wealth Management. Investors with enough assets can pull money from other sources while letting the investments in these retirement accounts continue to compound, he said.
Taxpayers taking an RMD for the first time have until April of the following year to do so – so under the new rule, for example, someone turning 73 this year would have until April 2024 to take their first RMD if they were not required to do so last year (for example, they were still working for the employer tied to their workplace retirement plan). Investors who turned 72 last year and did not take their first RMD must still take their first by April 2023.
Account holders turning 72 this year, who expected to take their first RMD by April next year, now have until April 2025 to make their first withdrawal.
Traditional retirement accounts are subject to RMDs, unlike Roth IRAs. Roth employer-sponsored plans, such as the Roth 401(k), were also subject to RMDs, but they will no longer have that requirement beginning in 2024 under the Secure Act 2.0.
RMDs are calculated using the account holder’s age and the Internal Revenue Service’s life expectancy table, as well as the account balance of the prior Dec. 31. Account holders who fail to take an RMD face a 50% penalty on the amount that was not distributed. The Secure Act 2.0 lowered that penalty to 25%, and even lower to 10% for some account holders who correct the mistake quickly.
Taking the first RMD in the following year is an option, but investors should be aware that all subsequent RMDs must be made by Dec. 31 every year. Anyone pushing back their RMD to April of the following year will have to take two distributions in that year.
“Waiting an extra year could also increase the amount the taxpayer must withdraw, since the account has an extra year to build upon its assets and the account holder will be one year older”, said Thomas F. Scanlon, a certified financial planner with Raymond James Financial Services.
Thomas F. Scanlon, CPA, CFP®
Manchester, CT
There are a few other strategies to consider, advisers said. Roth conversions do not count as RMDs. Investors may choose to do a conversion to lower their account balance, and as such, reduce future RMDs, said Kevin J. Brady, vice president and adviser at Wealthspire Advisors. “This gives them an extra year to do that,” he said.
Knowing when to take an RMD can be difficult. Investors in a low tax bracket may want to take it sooner, Brady said. It’s important to assess current and potential future tax liabilities, he added – for example, if someone’s first and subsequent RMD taken in the same year are fairly modest, and that taxpayer can stay in the same tax bracket, waiting another year could work. “It’s hard to know for sure unless you’re working with a CPA directly or have a really good handle on your taxes,” Brady said.
Raymond James is not affiliated with and does not endorse the opinions or services of Kevin Brady or Timothy McGrath. Opinions expressed in the attached article are those of the author and are not necessarily those of Raymond James. RMD’s are generally subject to federal income tax and may be subject to state taxes. Consult your tax advisor to assess your situation. Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional.