For older Americans, the required minimum distributions of retirement accounts are undergoing a makeover.
Above the age of 70 to 72, to 72, when annual withdrawals are expected to begin – starting this year, due to Congress approval of the Secure Act – updated life expectancy tables proposed by the IRS by 2021 would change the way you calculate these RMDs.
"The age change is small but useful," said certified financial planner Mark Wilson, president of MILE Wealth Management in Irvine, California. "Using longer life expectancy calculations would slightly reduce the minimum required value."
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RMDs apply to 401 (k) plans – both the traditional and Roth versions – and similar work plans, as well as most individual retirement accounts (Roth IRAs do not come with the necessary withdrawals before death. from the account owner).
Be aware that while the Secure Act has raised the age of RMD, people who reached 70 and a half before 2020 must still do their RMDs. Reach this age after 2019 and you can wait until 72 years according to the new rule.
As before, you can postpone your first RMD until April 1 of the year following the year you reach RMD age. In all subsequent years, you must receive the required amount by December 31st. Failure to do so will result in a 50% penalty.
However, if you are working and contributing to an employer-sponsored retirement plan (and you do not own more than 5% of the company), RMDs will not apply to that specific account until you retire.
The amount you must withdraw is basically determined by dividing the balance of each eligible account by the life expectancy set by the IRS.
If the agency approves the proposed updated tables, it will mark the first changes since 2002 and may take effect next year. The graphs below illustrate how RMD values - and account balances – differ over time using current and proposed life expectancy calculations.
Be aware that if you only did the RMD each year and lived to be at least 90 years old, these minimum values would become higher in the new proposed table than in the current one. Basically, this is due to lower RMDs at the beginning, which leaves more to grow – and higher balances will eventually result in higher RMDs later in life.
In total, a $ 500,000 account at 72, whose only withdrawals are RMDs, would be worth about $ 34,000 more at age 95 on the proposed life expectancy tables, based on the growth assumptions used in the charts. At that age, however, the RMD would be $ 3,706 more than current IRS tables.
In addition, the Secure Act has changed the rules for legacy retirement accounts. Most non-friend group beneficiaries will now have to withdraw the money within 10 years of the original account owner's death. Previously, IRA beneficiaries could stretch withdrawals for many years based on their own life expectancy.
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Although RMDs apply whether their assets are scarce or massive, most account holders apparently withdraw more, according to the IRS: Only 20.5% should carry only the minimum in 2021.
"The only people with the bare minimum are those who don't need the money," said Ed Slott, CPA and founder of Ed Slott and Co. in Rockville Center, New York.
He added, however, that if you can postpone withdrawals, the older age of RMD will be helpful.
The only people who take only the minimum are those who do not need the money.
Founder of Ed Slott and Co.
"These people can wait a little longer, and the icing on the cake will be the new tables, giving them a longer life expectancy so they can spend a little less," said Slott.
In addition, a later age than RMD could potentially allow people extra time to do some tax planning to minimize the impact of these withdrawals when they need them.
For example, some consultants recommend transferring money to a Roth IRA from a traditional or 401 (k) IRA. Although you will have to pay taxes on the converted amount, you will not pay taxes for Roth withdrawals on the way. In addition, you can spread this conversion over several years to minimize the annual tax impact.
. (tagsToTranslate) Internal Revenue Service (t) 401 (k) plans (t) Individual Retirement Accounts (t) Tax Planning (t) Personal Savings (t) Retirement Planning (t) Investment Strategy (t) Personal Finance (t ) business news