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If you could delay making required withdrawals from your retirement accounts until age 72 instead of 70½, what would the effect be?
While you may end up with more savings as a result, the difference probably wouldn't be enough to make or break your retirement, financial advisors say.
As part of the Secure Act, a bill before Congress that aims to improve the nation's retirement savings, the age at which you must begin taking required minimum distributions (or RMDs) from retirement accounts would increase by 18 months.
"It really wouldn't make that much difference for most people," said certified financial planner Mark Wilson, president of MILE Wealth Management in Irvine, California. "Most people can't afford to delay taking money from their accounts anyway."
The Secure Act was passed by the House of Representatives in late May and now awaits Senate action. In addition to increasing the age for RMDs, the bill would make it easier for small businesses to band together to offer 401(k) plans; require businesses to let long-term, part-time workers become eligible for retirement benefits; and repeal the maximum age for making contributions to traditional individual retirement accounts (right now, it's 70½). It also would make it easier for annuities to be offered in retirement plans.
Whether all of the provisions will make it into a final measure agreed upon by both chambers of Congress is uncertain. And other retirement bills in the mix that seek additional changes — including one that proposes an RMD age of 75 — are unlikely to gain any traction until legislators are able to finalize the Secure Act.
Required withdrawals apply to 401(k) plans — both traditional and the Roth version — and similar workplace plans, as well as most individual retirement accounts (Roth IRAs do not come with required withdrawals until after the account owner's death).
Current law says you have to take your first RMD for the year in which you turn 70½, although it can be delayed until April 1 of the following year. In all subsequent years — including the one when you take your first RMD by April 1, if you go that route — you must take the required amount by Dec. 31. If you're working and contributing to a retirement plan sponsored by your employer, RMDs do not apply to that particular account until you retire.
The amount you must withdraw is basically determined by dividing the balance of each qualifying account by your life expectancy as defined by the IRS.
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Advisors say that if you were to leave the money in the account to continue growing, the higher balance at age 72 would mean a higher RMD — both because of the higher balance and a shorter life expectancy than at age 70½.
"If the life expectancy tables aren't changed, you'd just have to withdraw a larger amount," said Kristi Sullivan, a CFP and owner of Sullivan Financial Planning in Denver.
The charts below illustrate how a theoretical $500,000 portfolio would perform over time, earning 5% annually, under the current and proposed law. The difference at age 89 is $33,500 more if RMDs started at age 72.
However, a later RMD age could potentially allow wealthier people extra time to do some tax planning to minimize the impact of those withdrawals when they do need to take them.
For example, some advisors recommend moving money to a Roth IRA from a traditional IRA or 401(k). While you'd have to pay taxes on the amount converted, you'd pay no taxes on those Roth withdrawals down the road. And, you can spread that conversion over several years to minimize the annual tax impact.
At the same time, however, the Secure Act also proposes changing the rules that apply to inherited retirement accounts — the so-called stretch IRA. It would require most nonspouse beneficiaries to withdraw the money within 10 years of the original account owner's death. Right now, the amount that must be withdrawn by those beneficiaries is based on their own life expectancy — which often is far longer than a decade.
"Losing the stretch IRA would change a lot of planning," Wilson said.