Lawmakers just passed end-of-year legislation that will keep the federal government operational in the coming year. As often happens, that legislation included a number of provisions that aren’t strictly related to the immediate needs of government operations. The 2022 year-end spending package was noteworthy in that it included several aspects of retirement reform that often got referred to as SECURE 2.0.
Among the provisions that are set to become law is one that many retirees will appreciate using almost right away. Even though this provision will give some retirees a much-desired reprieve from having to make a tax-increasing move in 2023, many taxpayers would actually be better off choosing not to take advantage of it. Read on for a more complete explanation of what Washington will let people with retirement accounts do next year and what your best strategy might be.
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Required minimum distributions and the new law
Under prevailing law prior to the most recent spending bill, those who turn 72 in a given year have to start taking required minimum distributions (RMDs) from most of their retirement accounts. Although Roth IRAs aren’t subject to RMD regulations, most other retirement accounts are, including traditional IRAs and employer-sponsored plans like 401(k)s and 403(b)s.
Most of the time, those subject to RMD rules have to take those distributions on or before Dec. 31. However, those turning 72 get a one-time choice to delay their first RMD until April 1 of the following year.
Under the provisions of the SECURE 2.0 legislation, the RMD age will go up from 72. Retirees will get immediate relief in 2023 as the RMD age will rise to 73. It will stay there for 10 years but in 2033, will rise by two years to 75.
In addition, the new law will resolve what was a strange inconsistency in previous provisions covering RMDs. Before the new rules took effect, Roth 401(k) and Roth 403(b) accounts were subject to required minimum distributions, even though Roth IRAs were not. The SECURE 2.0 provisions passed in the spending bill will apply the RMD-free status to all Roth-style accounts, regardless of whether they are IRAs or employer-sponsored plan accounts.
Who benefits from a higher RMD age?
The new law won’t affect anyone who turned 72 in 2022 or earlier, as they will still have to take RMDs. However, those who will turn 72 in 2023 and planned to start taking RMDs next year will get a one-year reprieve. Everyone younger than that will get one more year of RMD-free treatment, as well.
Many people like not having to take RMDs. When you take withdrawals from most retirement accounts, you have to pay tax on the amount you withdraw. Not taking distributions means deferring those taxes longer.
The thing is, though, that taking distributions from retirement accounts earlier than you have to is sometimes a smart move. For instance, those who retire in their 60s typically see their income levels fall sharply as a result of no longer working. When that happens, it can push you into a much lower tax bracket than you were in before. If you can take advantage of low 12%, 10%, or even 0% brackets for withdrawals, it makes sense to take at least some money out of your retirement accounts, even if RMD rules don’t force you to.
Another strategy is to convert some of your traditional retirement account holdings to Roth-style accounts. Doing so triggers tax, but it makes any future income and gains on Roth assets tax-free going forward. It’s also not subject to RMDs in the Roth, so you’ll be able to reduce future required withdrawals, as well.
Make the best use of your money
Many people don’t have the luxury of leaving retirement money untapped until their early 70s after they stop working. Even if you’re one of them, though, be sure to consider the tax impacts of waiting, compared to making earlier withdrawals. You might be surprised at what you come up with as the best answer for you.
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