New RMD Rules under the Secure act
The Secure Act was passed in 2019 under the Trump Administration to promote more favorable rules for retirees, among other tax law changes. Just over three years later, we have new regulations that have made things even more favorable for those with a retirement account with the passage of Secure Act 2.0 under the Biden Administration.
While there are many changes made under this new law affecting retirement accounts, the one thing that most of my clients want to know about is what happens to the RMD age. Under this new tax bill, the first mandatory distribution year has been pushed back to age 73. For those that turn 74 in or after the year 2033, the minimum distribution age will be age 75. Considering that life expectancy actually decreased to its lowest point in 26 years, this is great news for investors across the board.
RMDs are calculated based on life expectancy. The older you are, the higher the percentage of your account you are required to withdraw from your retirement account. In the first year of RMDs, you are required to withdraw just under 4% of your account balance. This number slowly goes up over time and exceeds 10% in your early 90s. AARP has a pretty neat calculator to help you visualize what your RMDs look like.
If you have a retirement plan (401k, Simple IRA, etc.), you may defer your required withdrawals until retirement if you work past age 73. If you own more than 5% of the business, like many of our clients, then you do not receive this luxury and must take RMDs on schedule. ROTH IRAs, my favorite type of investment account, are not subject to these MRD rules. Depending on your tax situation and current objectives, it may be worth having a conversation if converting your IRA to a ROTH makes sense. Additionally, if you own a ROTH 401k, it may be rolled into a ROTH IRA under certain circumstances, which would again allow you to avoid MRDs.
At the end of the day, no two people are alike. Comprehensive financial planning is about understanding what someone is trying to accomplish and helping them create a custom roadmap to get there. If you have any questions, I’m here to help.
