If you are turning 70½ this year and you aren’t too excited about taking your first RMD (required minimum distribution) from your retirement account, guess what? You are in luck! The SECURE Act, which was just signed into law in December of 2019, extended the age that you must start taking those RMDs to age 72.
There are several planning opportunities/benefits that now exist because this age has been extended and that’s what I’m talking about in today’s video.
- How the new RMD age rule will impact your taxes
- How the extra time for Roth conversions can save you money
- And why your beneficiaries will thank you for planning ahead under this new rule!
Click here to watch the full video or read the full video transcript, below.
RMD Law Change Explained
Prior to 2020, you had to start taking mandatory withdrawals from your IRA once you reached the age of 70½. However, the beauty of a traditional IRA is you’re going to get a tax deduction on the contribution that you make and then that money grows tax free from that point forward until you start taking money out of the account.
Here’s what’s not so great about IRA accounts. Uncle Sam comes to you with his hand out and says, “Okay, I’ve been your tax partner all along. You haven’t paid any taxes. I want my money. Now I’m going to force you to take money out!” You’d have to pay the taxes at your income tax rate.
Every year when you start taking those required minimum distributions, that amount gets added to your annual income for the year and you pay taxes on the distributions. Because you can wait, you don’t have to take those distributions and pay the associated taxes until you are 72.
New RMD Age Benefit: Taxes Deferred
Under the new SECURE Act, you don’t have to take your RMD distributions and then pay the taxes on them until you are 72. If you need that money sooner, it might make sense to take withdrawals from other accounts. In other cases, which we’ll talk about in future videos, it might make more sense to take those IRA distributions out first. It just depends on your situation.
New RMD Age Benefit: More Time For Roth Conversions
Another important planning opportunity here is that you have a longer amount of time to convert money in your traditional IRA to a Roth. Let’s say you retire at 65, but you don’t have to start taking your RMD until you’re 72. Now you have seven years to try to convert as much money into a Roth as possible.
There’s usually the sweet spot for a lot of people in the early years of retirement. When you retire and your income goes down, it makes sense to then convert that money to Roth and pay the taxes on it to get it permanently out of the traditional IRA. Then, when you start taking those distributions at 72, it’s now a smaller pot and the future taxes will potentially be lower and the amount of money that you’re forced to withdraw every year will potentially be lower as well.
New RMD Age Benefit: Beneficiaries Inherit More
The important tie-in here with Roth conversions is by having more time to put more money in to your Roth, your beneficiaries will inherit more than they otherwise would have had that money been in a Traditional IRA.
Under the SECURE Act, as I’ll talk about in a subsequent video, your beneficiaries will be forced to take distributions from the IRAs over a 10-year time period. I don’t know about you, but I would much rather take money out of a Roth and not pay taxes on it versus taking money out of a traditional IRA and potentially paying a lot of taxes on that!
The bottom line here is that by extending the RMD to age 72, there’s a window of opportunity that has opened. There are tax and estate planning considerations that you may want to look at, that weren’t available or didn’t make sense before. At the very least, it offers you some additional flexibility where you have another 1½ to 2 years where you’re not forced to take those withdrawals out of your account and you can take it out of other accounts instead.
Stay Tuned… Next week and in the coming weeks, I’ll be diving deeper and getting in to more details on RMD rules.