A brand new law increasing the age you should withdraw out of your retirement accounts may include some unexpected and expensive consequences.
President Biden inked in December pushes the age that retirees must start taking required minimum distributions, or RMDs, from IRAs, 401(k)s, and 403(b) plans, to 73 this yr, up from 72. That may bump up higher to age 75 in 2033. The delay allows investments to grow tax-free even longer and offers a window to sock more tax-deferred dollars away.
But postponing your RMD may ultimately leave you with larger required annual withdrawals later in life, pushing your income into a better tax bracket which will affect what you pay in taxes for or to your Medicare premiums. It could also change into a tax headache for heirs.
“The more you ward off on the RMD age, the shorter that window to get all of that cash out becomes,” Ed Slott, a in Recent York and an authority on IRAs, told Yahoo Finance. “And as you stuff more income right into a shorter time period, overall you and your beneficiaries are going to find yourself paying more in taxes.”
RMD rules
You possibly can’t keep funds in a retirement plan or a standard IRA (including SEP and SIMPLE IRAs) indefinitely. Eventually, they have to be cashed out and taxed as odd income.
The brand new rule requires that when you hit 73, you’ve gotten no alternative but to begin pulling money out with an RMD, which is calculated by dividing your tax-deferred retirement account balance as of Dec. 31 of the preceding yr by a life expectancy factor that corresponds along with your age within the IRS As your life expectancy declines, the proportion of your assets that should be withdrawn ramps up.
Under the brand new law, account holders who fail to take an RMD face a 25% penalty on the quantity that will not be distributed, down from 50%. And should you fix it fast, the penalty is lowered to 10%.
Tax implications
If you’ve gotten other taxable income along with your Social Security advantages, equivalent to your RMD, that may impact how much your profit is perhaps taxed.
For those who file a federal tax return as a person and your combined income — your adjusted gross income, plus nontaxable interest you’ve gotten earned on investments, plus one-half of your — is between $25,000 and $34,000, you will have to pay income tax on as much as 50% of your advantages. For those who earn greater than $34,000, as much as 85% of your advantages could also be taxable.
For those of you who file a joint return and have a combined income between $32,000 and $44,000, you will have to pay income tax on as much as 50% of your advantages. In case your joint income is greater than $44,000, as much as 85% of your advantages could also be taxable.
Furthermore, should you delay taking funds out, your RMD based in your dwindling life expectancy will likely be larger, and if tax rates should increase, you’ll ultimately pay a much bigger tax bill.
“The tradeoff is that there could potentially be higher RMDs later and guessing what future income tax rates will likely be is sort of a big gamble. In the event that they are higher in the long run, they’d be worse off than taking them earlier,” said Eileen O’Connor, an authorized financial planner and co-founder of , told Yahoo Finance.
Slott had an identical take.
“Individuals who don’t need the cash think they’re saving something by delaying the RMD,” Slott said. “But over the long haul, they could find yourself paying more in tax by waiting till 73 and only taking minimum distributions.”
The potential impact on Medicare premiums
Delaying your RMD also can have repercussions in your Medicare premiums. are based in your modified adjusted gross income, or MAGI. That is your total adjusted gross income plus tax-exempt interest.
Simply put, if you’ve gotten higher income, you may wind up paying a further premium amount for Medicare Part B and Medicare prescription drug coverage. The usual rates bump up for people with a MAGI above $97,000 and for married couples with a MAGI of $194,000 or more.
Heirs may feel the sting
“The delay of the RMD can create a harder planning environment if heirs are involved since they should empty inherited IRA distributions inside 10 years,” O’Connor said.
The fact is that the more cash you allow socked away in a retirement account to your heirs to inherit, the larger the tax bite it might be for them. It’s likely they may inherit once they are probably in the best tax bracket of their life during their peak earning years. Because of this, they may find yourself paying more in taxes.
“And because the is now 76.4, they might be leaving plenty of IRA assets to heirs,” O’Connor said.
Kerry is a Senior Reporter and Columnist at Yahoo Finance. Follow her on Twitter @kerryhannon.
Read the most recent financial and business news from Yahoo Finance
Download the Yahoo Finance app for Apple or Android
Follow Yahoo Finance on Twitter, Facebook, Instagram, Flipboard, LinkedIn, and YouTube.