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The age when older Americans must start making withdrawals from retirement accounts could change yet again.
Under a provision in proposed retirement legislation pending in Congress, required minimum distributions, or RMDs, would start at age 75 by 2032, up from age 72 — which only took effect last year after the 2019 Secure Act raised it from age 70½.
The proposed adjustment would generally not impact most retirees: The majority — 79.5%, according to the IRS — take more than their RMD because they need the money. However, for the 20.5% who take only the minimum amount required, the extra years could provide more time to strategize how to best handle those assets.
“As a financial advisor, I cheer [a higher age] because we’d get more flexibility and more years to do planning,” said certified financial planner Mark Wilson, president of MILE Wealth Management in Irvine, California. “Even if most people are drawing more than the required amount, it would still be a positive thing.”
Generally speaking, RMDs are a thorn in the side of retirement-account owners who don’t need the money when the government says they have to start withdrawing it.
“I think they should just eliminate lifetime RMDs altogether,” said Ed Slott, CPA and founder of Ed Slott and Company. “They’re a real nuisance for seniors.”
Current law says you have to take your first RMD for the year in which you turn 72, although that first RMD can be delayed until April 1 of the following year. If you’re employed and contributing to your company’s retirement plan, RMDs do not apply to that particular account until you retire.
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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.
For example, if you’re 75, that number would be 22.9 (until new life expectancy tables kick in next year), according to the IRS. Divide your account balance — say it’s $100,000 — by that factor and your RMD would be about $4,366.
For individuals who don’t need the money, delaying the RMD age would provide an opportunity to convert more of their traditional 401(k) or IRA over time to a Roth IRA. While taxes are paid on the converted money, withdrawals down the road would be tax-free, unlike distributions from a traditional IRA or 401(k), which are taxed as ordinary income.
And, there are no RMDs with Roth IRAs during the account owner’s lifetime. However, for all inherited individual retirement accounts, 401(k) plans or other qualified retirement accounts, the balance must be entirely withdrawn within 10 years if the owner died after 2019, unless the beneficiary is the spouse or other qualifying individual.
If a retiree’s money were left in a traditional IRA or 401(k) to grow until the later RMD age, the difference would not make or break a person’s retirement, experts say. A higher account balance would mean larger RMDs, as well.
The charts below illustrate how a theoretical $500,000 portfolio would perform over time, earning 5% annually under an RMD age of 72 and age 75. The difference at age 95 is $40,391 using the later RMD age.
As for the proposed legislation in Congress that includes the higher RMD age: The two bipartisan bills — which are in the early stages of the legislative process — differ slightly in their particulars.
Under the House bill, those mandated annual withdrawals wouldn’t have to start until age 73 in 2022, and then age 74 in 2029 and age 75 by 2032. The Senate bill would raise the RMD age to 75 by 2032. It also would waive RMDs for individuals with less than $100,000 in aggregate retirement savings, as well as reduce the penalty for failing to take RMDs to 25% from the current 50%.
