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New retirement withdrawal rule could backfire in costly ways

A new law increasing the age at which you must withdraw from your retirement accounts may have unintended and costly consequences.

President Biden inked in December is pushing back the age at which retirees must begin receiving required minimum distributions, or RMDs, from IRAs, 401(k) and 403(b) plans, to 73 this year, from 72. until age 75 in 2033. The delay allows investments to grow even longer tax-deferred and provides a window to pocket more tax-deferred dollars.

But deferring your RMD can ultimately leave you with larger required annual withdrawals later in life, pushing your income into a higher tax bracket that can affect what you pay in taxes for. or for your health insurance premiums. It could also become a tax headache for heirs.

“The longer you push back the age of RMD, the shorter the window to withdraw all that money becomes,” Ed Slott, a in New York and an IRA expert, told Yahoo Finance. “And as you accumulate more income over a shorter period, overall, you and your beneficiaries are going to end up paying more taxes.”

Bad news in the mail

(Photo: Getty Creative)

RMD rules

You cannot keep funds in a pension plan or traditional IRA (including SEP and SIMPLE IRAs) indefinitely. Eventually, they must be collected and taxed as ordinary income.

The new rule requires that once you turn 73, you have no choice but to start withdrawing money with an RMD, which is calculated by dividing the balance in your taxable retirement account deferred to December 31 of the previous year by a life expectancy factor. that matches your age in the IRS As your life expectancy decreases, the percentage of your assets that need to be withdrawn increases.

Under the new law, account holders who do not take RMD face a 25% penalty on the undistributed amount, up from 50% previously. And if you correct it quickly, the penalty is reduced to 10%.

Tax implications

If you have other taxable income in addition to your social security benefits, such as your RMD, this may impact the amount of your benefit that may be taxed.

If you file a federal tax return as an individual and your combined income – your adjusted gross income, plus non-taxable interest you earned on investments, plus half of your — is between $25,000 and $34,000, you may have to pay income tax on up to 50% of your benefits. If you earn more than $34,000, up to 85% of your benefits may be taxable.

For those of you who file jointly and have combined income between $32,000 and $44,000, you may have to pay income tax on up to 50% of your benefits. If your joint income is over $44,000, up to 85% of your benefits may be taxable.

Also, if you delay withdrawing funds, your RMD based on the decrease in your life expectancy will be greater, and if tax rates were to increase, you would ultimately pay a larger tax bill.

“The trade-off is that there could be higher RMDs later and guessing what the future income tax rates will be is a pretty big gamble. If they are higher in the future they would be worse off. better off than taking them sooner,” said Eileen O’Connor, Certified Financial Planner and co-founder of told Yahoo Finance.

Slott had a similar take.

“People who don’t need the money think they’re saving something by delaying RMD,” Slott said. “But in the long run, they could end up paying more taxes by waiting until age 73 and taking only minimal distributions.”

The potential impact on Medicare premiums

Delaying your RMD can also impact your Medicare premiums. are based on your modified adjusted gross income, or MAGI. This is your total adjusted gross income plus tax-free interest.

Simply put, if you have a higher income, you could find yourself paying an additional premium amount for Medicare Part B and Medicare prescription drug coverage. Standard rates increase for individuals with a MAGI above $97,000 and for married couples with a MAGI of $194,000 or more.

Heirs can also feel the sting

“The RMD delay can create a more difficult planning environment if heirs are involved because they must empty out legacy IRA distributions within 10 years,” O’Connor said.

The reality is that the more money you leave in a retirement account for your heirs to inherit, the bigger the tax bite can be for them. They are likely to inherit when they are likely to be in the highest tax bracket of their lifetime during their highest earning years. As a result, they will end up paying more taxes.

“And since the is now 76.4, they could leave a lot of IRA assets to heirs,” O’Connor said.

Kerry is a senior reporter and columnist at Yahoo Finance. Follow her on Twitter @kerryhannon.

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