Constantly changing the playbook. From my reading some very important and positive changes for RMD and retirement accounts.

Putting money into a 401(k) is simple. Taking money out often requires an exit strategy.

The tax breaks baked into retirement accounts don’t last forever. Retirees or their heirs eventually must start draining their balances by taking annual withdrawals known as required minimum distributions or RMDs, triggering tax bills.

The rules for RMDs changed recently and could change again soon, reshaping the way people plan for retirement and expanding opportunities for some retirees to reduce future income taxes.

Last week, the House of Representatives voted to delay the age at which people must start taking money out of most retirement accounts to 75, from 72. If the bill, which currently has bipartisan support in the Senate, becomes law, it would mark the second time in three years that Congress raised the required distribution age. That move is a boon to those who can afford to sit on nest eggs longer to allow for more tax-deferred growth.

Yet complicating the picture is recent IRS guidance that requires many who inherit retirement accounts to drain them faster—over 10 years instead of a lifetime.

The changes have sparked confusion around the rules for spending down accounts, said Ed Slott, an IRA specialist. But they also expand opportunities to use certain strategies “to reduce complexity and taxes,” he added.

Here is a breakdown of the current and proposed required distribution rules, along with some strategies to consider.

When do required minimum distributions start and how much must be withdrawn?
Under a law Congress passed in 2019, people can now wait until age 72 to start required distributions from traditional IRAs and 401(k)s, 18 months longer than under prior RMD rules.

Withdrawals can be made earlier, but the IRS requires people 72 and older to withdraw a set minimum amount annually, or face a 50% excise tax on the amount they should have taken.

To determine your annual RMD, divide your traditional IRA and 401(k) balances as of Dec. 31, 2021, by your life expectancy as listed in the IRS’s Uniform Lifetime Table. Or use this calculator.

(The IRS recently published new tables that reflect current life expectancies, which slightly reduce the amount most people must withdraw each year.)

People with Roth IRAs are exempt from RMDs. But due to a quirk in the law, those with Roth 401(k)s must take them, although the withdrawals are tax-free.

How would the House bill change the rules for required withdrawals?

The legislation would gradually increase the age at which savers must start taking withdrawals from 401(k)s and traditional IRAs to 73 next year, rising to 74 in 2030 and 75 in 2033.



Starting next year, the bill would also reduce the penalty for those who fail to take a required distribution from a 50% excise tax on the amount they should have taken to 25%. It would reduce the penalty further, to 10%, for those who quickly correct their mistake.

How does pushing back the age for RMDs change withdrawal strategies?
If the bill becomes law and RMDs are delayed, people who can afford it can let their balances grow before having to pay taxes on that money.

There are potential downsides. When required distributions do kick in, people might have to withdraw more money annually over a shorter time period, triggering higher tax bills, said Mr. Slott.

To better manage future taxes, it may make sense to use the longer period before RMDs start to convert some or all of your traditional retirement accounts to Roth accounts, said Wade Pfau, a professor at the American College of Financial Services in King of Prussia, Pa.

Although you will have to pay income tax on the money you convert to a Roth, advisers often recommend Roth conversions in the early years of retirement before RMDs begin, since many retirees find themselves in temporarily lower tax brackets then.

By moving money into a Roth, your tax-deferred account will be smaller. And when required distributions begin, the withdrawals—and the taxable income they create—will be lower. Tax-free Roth withdrawals can also supplement income in years in which tapping other accounts would push you into a higher tax bracket.

Roth conversions become more costly once savers reach the age for required withdrawals. The RMD must be taken—and the income taxes paid—before any conversions can take place. (The RMD itself cannot be converted.) Taxpayers with RMDs often find themselves in higher tax brackets, leaving less of an incentive to convert, Mr. Slott said.

Roths can benefit heirs too. By moving money into a Roth, you are paying the income tax bill for your beneficiaries, said Mr. Slott.

Are there any other strategies to consider?
Pushing back the age to start RMDs also gives people with traditional IRAs who are charitably inclined more years in which to use a popular tax break to donate to charity and reduce their account balance. As with Roth IRA conversions, this can help lower future RMDs.

WSJ’S 2022 TAX GUIDE
Download the tax-guide ebook to find out what has changed in taxes and what it means for you.
This benefit, called a qualified charitable distribution, permits people with traditional IRAs who are 70½ or older to donate up to $100,000 a year directly to charities. If the account owner is 72 or older, the donations can count toward RMDs. Under the new law, the $100,000 limit would rise annually to account for inflation.

While the taxpayer receives no tax deduction for the donation, the withdrawal doesn’t count as income, which can help reduce income taxes and future income-based Medicare premiums. Donors can take the tax break whether they itemize or claim the standard deduction.

What are the rules for RMDs for people who inherit retirement accounts?
Current law generally requires people who inherit any type of retirement account—Roth or traditional—to take the money out and pay any taxes due within a decade.

There are exceptions for surviving spouses, disabled heirs, and the children of account owners who are under age 21. These beneficiaries can continue to use the old rules, which allowed them to spread required withdrawals and tax payments over their own life expectancies. That frequently gives them the option to leave more money inside the account to grow tax-deferred or tax-free for longer. Anyone who inherited Roth or traditional accounts before Jan. 1, 2020 can also use the old rules.

For heirs who fall under the new rules imposing a 10-year deadline on draining inherited accounts, the IRS recently issued two sets of requirements, depending on the age of the original account owner at death.

People who inherit an IRA or 401(k) from someone who died after turning 72—and was therefore subject to RMDs—must take at least the required minimum distributions in years one through nine, before fully draining the account in year 10.

Heirs who inherit from someone who dies before turning 72 aren’t subject to annual required distributions, although they must empty the account by the 10-year deadline.

I need a reliable financial planner to help me wade through this confusion and constant changes.

At some point, it seems like it might make sense to stop contributing to 401k (even if there is some employer match?) and just put the money into a personal fund (like an index fund) or fruit stock.

quote:

Originally posted by konata88:
At some point, it seems like it might make sense to stop contributing to 401k (even if there is some employer match?) and just put the money into a personal fund (like an index fund) or fruit stock.

I have great difficulty envisioning a scenario where purposely turning down the free tax-advantaged investment money of an employer's 401(k) match in favor of personal investments would make any sense... But I guess there's the possibility that there could be some extremely uncommon scenario out there where it might actually be worth it?

I get that you're thinking you don't want to have to pay as much tax on the RMDs later on, but keep in mind that the alternative is that you'd be double-taxed on the money involved in things like personal investment funds and stocks - income tax on the money when earned, followed by capital gains taxes on the investments. Retirement accounts like 401(k)s and IRA get the advantage of avoiding some of these taxes and deferring some other taxes, but in exchange have RMD rules. Plus, any income tax you'd end up having to pay on RMDs on a 401(k)/Traditional IRA is almost always going to be lower than what you'd be paying on the front end while you and your spouse are still earning your full working salaries and are sitting in a higher tax bracket.

Also, Roth IRAs have fewer RMDs that these other types of retirement funds. Unlike a Traditional IRA or a 401(k), Roth IRAs have no RMDs during the life of the original account owner. RMDs for those only trigger once the Roth IRA is inherited by the heirs. (Unfortunately, this doesn't apply to Roth 401(k)s...)

quote:

Originally posted by konata88:
I need a reliable financial planner to help me wade through this confusion and constant changes.

At some point, it seems like it might make sense to stop contributing to 401k (even if there is some employer match?) and just put the money into a personal fund (like an index fund) or fruit stock.

Why would you stop if there's a match?

IRA's, 401K's etc. were never meant to be tax free, just tax deferred. That way a larger amount of money earns through growth since you still have the entire amount, not just the after tax amount.

Then, when you are assumed to be in a lower income situation after retirement, you draw down from that larger amount. If you keep deferring the withdrawals until you are forced to take it out in larger annual withdrawals, it's a larger amount putting you in a higher tax bracket.

The real reason for this problem is due to not planning and acting on those plans early enough.

The only situation where I could see this being the case is if you might make more in retirement than you do while working. Other than that, no, ESPECIAALY with an employer match, which is essentially free money.

quote:

Originally posted by konata88:
I need a reliable financial planner to help me wade through this confusion and constant changes.

At some point, it seems like it might make sense to stop contributing to 401k (even if there is some employer match?) and just put the money into a personal fund (like an index fund) or fruit stock.

I have faith in the market and believe in inflation enough and have low faith in the tax writing of Congress that I do Roth 401k. And I max out to the point of pain. But the company match which is 4% of my salary up to 9k goes in as non Roth. So no I have this 401k at vanguard that has a lot in it. And contribution sources are all over the place. Company match, My own funds pre tax before Roth 401k was an option and my own funds Roth 401k post tax. Last several years have all been Roth from me
I’m sure it will be a nightmare to figure out in 25 years when I have to pull RMD and it’s 7 digits of fun. The upside is at this inflation rate 7 digit accounts won’t be that impressive

it's a constantly shifting calculus that's for sure. will be interesting to see the net result -- later is better but then as the article mentions -- the account balances will also likely be higher.

and add to that in 'early retirement' -- before eligible for Medicare -- trying to calculate the cost of ACA subsidies / health insurance

that's another moving target

----------------------------------

Honestly, I'm surprised to see Congress do anything that would decrease federal tax revenue. Unless of course they figure it'll buy them votes. That said, this is something I need to start paying attention to as I'm looking forward to retiring next year.

This isn't really much different than the way it's been for some time except you can wait until you're older to take out money in a required distribution.

Taking money out later, when your income is lower means it's taxed substantially less and that's not a bad thing.

OTOH, taking money from a 401K and rolling it over into a Roth means you'll have to pay taxes on what you rolled over in the year you do it and that could get pretty expensive.

Consider the tax repercussions of rolling over $100,000.00 or so and thus having to pay income taxes on it in a single year.

quote:

Taking money out later, when your income is lower means it's taxed substantially less and that's not a bad thing.

^^^^^^^^^^^^^^^
Of course. Everybody assumes they will be making less in those years. There are,however, plenty who are making a good income from both work and investments. My first CPA, a member of the greatest generation, told me to never make investments based on taxes. It has been good advice.

ZSMICHAEL, is this your own writing, or is it from some article?

^^ There's a buried "WSJ’S 2022 TAX GUIDE" bit of text midway into the copied-and-pasted OP, so I'm guessing this is from the Wall Street Journal.

Looks like it's from this WSJ article, which is locked behind a paywall: https://www.wsj.com/articles/t...tirement-11649079814

I don't mind the aspects of the new proposed laws as listed in the OP. It pushes out the RMD which gives you more time to make tax-efficient Roth conversions.

As far as inherited IRA accounts, I don't have any objection as the owner is dead already and it's just the inheritors who have to take it out. Of course, I'm assuming surviving spouses take over the IRA in a different way according to current law.

quote:

Originally posted by ZSMICHAEL:

quote:

Taking money out later, when your income is lower means it's taxed substantially less and that's not a bad thing.

^^^^^^^^^^^^^^^
Of course. Everybody assumes they will be making less in those years. There are,however, plenty who are making a good income from both work and investments. My first CPA, a member of the greatest generation, told me to never make investments based on taxes. It has been good advice.

This isn't making investments based on taxes, this is deciding whether to convert 401K to Roth or not.

Completely different thing.

And with respect to surviving spouse getting the IRA, they can convert it over to an IRA in their own name tax free and go from there.

quote:

ZSMICHAEL, is this your own writing, or is it from some article?

^^^^^^^^^^
Mine.

quote:

his isn't making investments based on taxes, this is deciding whether to convert 401K to Roth or not.

Completely different thing.

[quote]This isn't making investments based on taxes, this is deciding whether to convert 401K to Roth or not.
^^^^^^^^^^^
Guess you read a different article than what I posted.

quote:

Originally posted by ZSMICHAEL:
[QUOTE]his isn't making investments based on taxes, this is deciding whether to convert 401K to Roth or not.

Completely different thing.

quote:

This isn't making investments based on taxes, this is deciding whether to convert 401K to Roth or not.
^^^^^^^^^^^
Guess you read a different article than what I posted.

On the contrary, it was specifically mentioned in the article.

Although you will have to pay income tax on the money you convert to a Roth, advisers often recommend Roth conversions in the early years of retirement before RMDs begin, since many retirees find themselves in temporarily lower tax brackets then. By moving money into a Roth, your tax-deferred account will be smaller. And when required distributions begin, the withdrawals—and the taxable income they create—will be lower. Tax-free Roth withdrawals can also supplement income in years in which tapping other accounts would push you into a higher tax bracket. Roth conversions become more costly once savers reach the age for required withdrawals. The RMD must be taken—and the income taxes paid—before any conversions can take place. (The RMD itself cannot be converted.) Taxpayers with RMDs often find themselves in higher tax brackets, leaving less of an incentive to convert, Mr. Slott said. Roths can benefit heirs too. By moving money into a Roth, you are paying the income tax bill for your beneficiaries, said Mr. Slott. Although you will have to pay income tax on the money you convert to a Roth, advisers often recommend Roth conversions in the early years of retirement before RMDs begin, since many retirees find themselves in temporarily lower tax brackets then.

By moving money into a Roth, your tax-deferred account will be smaller. And when required distributions begin, the withdrawals—and the taxable income they create—will be lower. Tax-free Roth withdrawals can also supplement income in years in which tapping other accounts would push you into a higher tax bracket.

Roth conversions become more costly once savers reach the age for required withdrawals. The RMD must be taken—and the income taxes paid—before any conversions can take place. (The RMD itself cannot be converted.) Taxpayers with RMDs often find themselves in higher tax brackets, leaving less of an incentive to convert, Mr. Slott said.

Roths can benefit heirs too. By moving money into a Roth, you are paying the income tax bill for your beneficiaries, said Mr. Slott.

quote:

Originally posted by RogueJSK:
Looks like it's from this WSJ article, which is locked behind a paywall: https://www.wsj.com/articles/t...tirement-11649079814

So it is. Here's a non-paywalled link. non-paywalled link.
The change being discussed is hypothetical, a point sort of buried in the blizzard of text, given that only one house of our dysfunctional Congress has spoken.

quote:

If the bill, which currently has bipartisan support in the Senate, becomes law

It'll take 60 senators and Brandon to agree before this minor relaxation of the RMD rules becomes law. Forgive me if I wait to celebrate....