Secure 2.0 allows retirees to defer RMDs. That doesn’t mean they should.

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The Secure 2.0 Act gives savers 72 and up to an extra year before you have to withdraw money from your retirement accounts. But just because you can defer your required minimum distribution (RMD) doesn’t mean you necessarily should, financial advisors say.

The general pension law passed late last year raised the pensionable age from 72 to 73 in 2023. Beginning in 2033, the RMD age will increase to 75.

The changes immediately affect those turning 72 this year who would otherwise be required to take their RMDs by April 1, 2024. (The Internal Revenue Service gives first-timers a grace period until the spring of the following year; in all subsequent cases. For years, RMDs must be taken by the end of the year.) Your RMD is calculated based on your retirement income as of December 31 of the previous year. dividing the account balance by what the IRS calls your “life expectancy factor.” The amount received is counted as income. you have to withdraw it from your account and you will have taxes on it. RMD rules apply to traditional IRAs as well as employer-sponsored retirement plans such as 401(k)s and 403(b)s.

Most Americans don’t have the luxury of waiting because they need withdrawals from their retirement accounts to live on. But among those who can afford to wait, delay isn’t always the best move. If you delay your RMD and your retirement account balance grows, you’ll have to withdraw more money next year. (Even if your account balance stays the same, you’ll have to withdraw more because your life expectancy rate will be lower.) The extra income can increase not only the amount you pay in income taxes, but also your Medicare premiums. .

“Some of the old rules of thumb, like that you should let your tax-deferred accounts marinate as long as possible, don’t always apply,” says Josh Strange, a certified financial planner and NOVA’s Good Life Financial Advisors. in Alexandria. , Va.

Without a crystal ball showing how the markets will perform this year, it’s impossible to say whether current 72-year-olds could benefit from deferring their annual RMDs, all other factors being equal. (Market participants polled by Barron’s expected the S&P 500 to end the year higher than its current level.) But what if all other factors are not equal? Say you’re 72, expect to retire this year and be in a lower tax bracket next year. In that case, deferring your RMD to 2024 probably makes sense. Otherwise, if you plan to sell your principal residence next year and have a capital gain of more than $250,000 (or $500,000 if you’re married filing jointly), you can start taking your RMDs this year to avoid it. the larger RMD may be added to next year’s income along with your capital gains. This could result in higher Medicare premiums for you.

Instead of waiting until you’re at the RMD limit to do tax planning, you’ll have a better chance of managing the tax consequences if you start years in advance. “The sooner the better,” said Chris Yamano, a partner at Crewe Advisors in Scottsdale, Ariz. A popular move is to do a Roth conversion after retirement but before reaching RMD age. You’ll likely be in a lower tax bracket during that time, so converting your traditional IRA to a Roth IRA, either all at once or over several years, will mean you’ll owe less tax on the converted amount than you would otherwise. you did it when you were in a higher bracket.

It can also be beneficial to withdraw from your retirement accounts before you plan. For example, if earlier withdrawals would allow you to delay claiming Social Security until age 70 to get your full benefit, it might be worth considering. Boston University economics professor Lawrence Kotlikoff, who sells Social Security optimization software, ran a scenario for a hypothetical high-income couple in their early 60s who planned to retire and claim Social Security at age 64. The couple lived in New York and were planning. wait until 75 to take their RMDs. Using his MaxiFi software, he found that waiting until age 75 would be less taxing for this couple than starting smooth withdrawals at age 64, because the reduction in New York state taxes and Medicare premiums would outweigh the increase in federal taxes they owed. earlier withdrawals.

“It’s a very complicated calculation,” Kotlikoff said. “It’s really very personal.”

Email Elizabeth O’Brien at [email protected]