Required IRA, 401 (k) withdrawals begin at age 75 under the Congressional Act

Required IRA, 401 (k) withdrawals begin at age 75 under the Congressional Act

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The age at which older Americans must start making retirement account withdrawals could change yet again.

Under a provision in proposed pension legislation pending in Congress, required minimum distributions, or RMDs, would commence at age 75 through 2032, from age 72 – which only came into effect last year after the Secure Act of 2019 raised them from age 70½ would have.

The proposed adjustment would generally not affect 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 only take the minimum amount required, the extra years could provide more time to strategize on how to best manage those assets.

“As a financial advisor, I am cheering [a higher age] because we would have more flexibility and more years to plan, “said certified financial planner Mark Wilson, president of MILE Wealth Management in Irvine, Calif.” Even if most people got more than what they needed, it would still be a positive thing . ”

RMDs are usually a thorn in the side of retirement account owners who don’t need the money when the government says they need to withdraw it.

“I think they should just eliminate lifetime RMDs altogether,” said Ed Slott, CPA and founder of Ed Slott and Company. “They are a real nuisance for seniors.”

Current law states that you must file your first RMD for the year you turn 72, although that first RMD can be postponed until April 1 of the following year. If you are employed and contribute to your company’s retirement plan, RMDs will not apply to that particular account until you retire.

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The amount you need to withdraw is essentially determined by dividing the balance of each qualifying account by your IRS defined life expectancy.

For example, if you are 75 years old, that number would be 22.9 (until new life expectancy tables go into effect next year), according to the IRS. Divide your balance – say it’s $ 100,000 – by this factor and your RMD would be roughly $ 4,366.

For those who don’t need the money, delaying the RMD age would provide an opportunity to convert more of their traditional 401 (k) or IRA to a Roth IRA over time. While tax is paid on the converted money, withdrawals would be tax-free later on, as opposed to distributions from a traditional IRA or 401 (k), which are taxed as normal income.

And there are no RMDs with Roth IRAs for the life of the account holder. However, any inherited individual retirement accounts, 401 (k) plans, or other qualifying retirement accounts must be fully withdrawn within 10 years if the owner passed away after 2019, unless the beneficiary is the spouse or other qualified person.

If a retiree’s money was left in a traditional IRA or 401 (k) to grow through to later RMD age, the difference wouldn’t make or break a person’s retirement, experts say. A higher balance would also mean bigger RMDs.

The charts below illustrate how a theoretical $ 500,000 portfolio would perform over time that would earn 5% annually under RMD ages 72 and 75. The 95 year old difference is $ 40,391 using the later RMD age.

As for the legislation proposed 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 details.

Under the House Bill, these mandatory annual payouts would not have to begin before age 73 in 2022, then age 74 in 2029, and age 75 in 2032. The Senate bill would raise the RMD age to 75 by 2032 for those with less than $ 100,000 in total retirement assets, as well as reducing the penalty for failing to receive RMDs from the current 50% to 25%.

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Rachel Meadows

Rachel Meadows

Trending topics news writer who enjoys cooking, walking her dog and travel.

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