IRA required, 401 (k) withdrawals start at age 75 under congressional bill
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The age at which older Americans must start withdrawing from their retirement accounts could still change.
Under a provision of a pension bill pending in Congress, the minimum required distributions, or RMD, would start at age 75 by 2032, up from 72 – which only came into effect when last year after the Secure Act of 2019 lifted it from 70 and a half.
The proposed adjustment would generally not impact most retirees: the majority – 79.5%, according to the IRS – take more than their RMD because they need the money. However, for the 20.5% who only take the minimum amount required, the extra years might give more time to strategize on how best to manage those assets.
“As a financial advisor, I applaud [a higher age] because we would have more flexibility and more years to do the planning, ”said certified financial planner Mark Wilson, president of MILE Wealth Management in Irvine, Calif. “Even if most people draw more than the required amount, that would still be a positive thing.”
RMDs are usually a thorn in the side of retirement account owners who don’t need the money when the government says they need to start withdrawing it.
“I think they should just completely eliminate RMD for life,” said Ed Slott, CPA and founder of Ed Slott and Company. “They are a real nuisance for the elderly.
Current law states that you must take your first RMD for the year you turn 72, although this first RMD may be delayed until April 1 of the following year. If you are an employee and contribute to your company’s pension plan, RMD does not apply to that particular account until you retire.
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The amount you need to withdraw is basically determined by dividing the balance in each qualifying account by your life expectancy as defined by the IRS.
For example, if you’re 75, that number would be 22.9 (until new life expectancy tables come into effect next year), according to the IRS. Divide your account balance – let’s say it’s $ 100,000 – by this factor and your RMD would be around $ 4,366.
For people who don’t need the money, postponing the RMD age would provide the opportunity to convert more of their 401 (k) or Traditional IRA over time into a Roth IRA. Although taxes are paid on the converted money, subsequent withdrawals would be tax-free, unlike distributions from a traditional or 401 (k) IRA, which are taxed like ordinary income.
Additionally, there is no RMD with Roth IRAs during the account holder’s lifetime. However, for all inherited individual retirement accounts, 401 (k) plans or other qualified retirement accounts, the balance must be fully withdrawn within 10 years if the owner has died after 2019, unless the beneficiary is the spouse or another eligible person.
If a retiree’s money were left in a traditional or 401 (k) IRA to grow until later RMD age, the difference wouldn’t make or destroy a person’s retirement, experts say . A higher account balance would also mean larger RMDs.
The charts below illustrate the performance of a notional $ 500,000 portfolio over time, gaining 5% per annum under an RMD age of 72 and 75. The difference at age 95 is $ 40,391 using the later RMD age.
As for legislation proposed to Congress that includes the higher RMD age: the two bipartisan bills – which are in the early stages of the legislative process – differ slightly in their details.
Under the House bill, these mandatory annual withdrawals are not expected to begin until age 73 in 2022, then 74 in 2029, and 75 by 2032. The Senate bill would extend RMD age to 75 by 2032. It would also waive RMD for people with less than $ 100,000 in overall retirement savings, as well as reduce the penalty for failing to take RMD to 25% over 50% current.