A newly passed bill known as Secure Act 2.0 will change how retirees withdraw from their retirement nest eggs. This fundamental change increases the age at which investors must take money from their retirement accounts, bringing about some impactful financial planning opportunities.

What is an RMD?

Once an investor reaches a specific age, they must withdraw a required minimum distribution (RMD) from their retirement account, such as an IRA or 401(k). The RMD amount is determined by the account holder's age and account balance at the end of the previous year. The Internal Revenue Service (IRS) requires RMDs to ensure account holders pay taxes on their retirement savings. RMDs, therefore, can be taxed on both federal and state taxes.

After reaching their RMD age, account holders must begin taking withdrawals from retirement accounts by April 1. Each subsequent year, RMDs must be taken by December 31st of that same year. The IRS may levy a sizable penalty for failure to take the mandatory distribution.

Good news, RMDs will be delayed by a year

A notable update from Secure Act 2.0 is the delay of RMDs. RMDs will start at age 73 instead of 72 for those born in 1951-1959. For those born in 1960 or later, RMDs will be delayed even further to age 75.

For those who turn 72 in 2023, you will not need to start your RMDs this year. Your first RMD can either be taken by December 31, 2024 or delayed until April 1, 2025.

There is no impact on a retiree if they have already started taking their RMDs or need their IRA to cover their cost of living. For others, who only take RMDs because they are required to, this significant modification to the RMD age provides additional retirement planning opportunities.

Retirement Planning opportunities

There will be more time for growth.

The new RMD regulation will give retirees a simple yet powerful benefit, more time for compounding growth. As the billionaire investor Charlie Munger states, “The first rule of compounding is to never interrupt it unnecessarily.”

This benefit must be highlighted, especially after a year of market losses.

An 8% return on a million-dollar IRA is $80,000. Additional returns undisturbed by an unnecessary RMD can have a snowball effect, providing an exponential lifetime benefit.

A longer window before RMDs can allow for additional planning and time, the essential ingredients in building wealth.  

QCDs can still be maximized.

Amidst the RMD age adjustment, the age at which account holders can use their IRAs to make Qualified Charitable Contributions (QCDs) was untouched. Thus, preserving one of the most powerful tax-saving strategies available to charitably inclined retirees 70.5 and older.

A QCD is a tax-free transfer of funds from an individual's IRA directly to an IRS-recognized charity. This charitable distribution allows taxpayers to avoid paying taxes on the withdrawn funds.

Retiree “Gap Years” are extended.

"Gap Years" are the years that occur between a person's retirement and the beginning of their RMDs. These Gap Years are often the years with the lowest taxable incomes in a person's adult life. As a result, they frequently serve as ideal years for accelerating income that would otherwise be taxable in a subsequent, higher-income year. The Secure Act 2.0's changes will give additional time for Tax Bracket optimization strategies such as Roth Conversions and Capital Gain Realization to reduce an investor's lifetime tax bill.

You may be pushed into a higher tax bracket in your later years.

Like all financial planning strategies, there is no one-size fits. The unanticipated pitfall of postponing RMDs can lead to more significant withdrawals in subsequent years when RMDs do start. An unexpected boost in income from RMDs might push you into a much higher tax bracket, phase you out of a tax credit, or trigger a surtax. Taking the time to understand the applicable tax implications are crucial when building a tax-sensitive retirement income plan.

This is a great time to reevaluate your retirement plan

The retirement system has undergone numerous changes due to Secure Act 2.0's policy reforms, adding to the difficulty of retirement planning. Recognizing the planning opportunities and risks that relate to you and your financial plan is essential.

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