Earlier this week, the House Ways & Means Committee introduced a bill to raise the RMD (required minimum distributions) age to 72 from 70½. The Ways and Means Committee is expected to vote on the new measure next week. Investors who reach age 70½ are faced with a requirement: Start taking annual withdrawals from tax-sheltered retirement accounts such as IRAs and 401(k)s, and pay taxes on those assets. The oldest of the 75 million baby boomers in the U.S. turned 70½ on July 1, 2018, which means they must take their first required withdrawal (if they haven’t done so already) by April 1 of this year.
If the bill passes, it would echo what many have been saying for a long time – 70½ is too young. Many baby boomers may continue working well into their 70s and they shouldn’t have to withdraw retirement money they don’t need and pay a hefty tax bill. Some have even argued that the government should raise the age for required minimum distributions to at least 80—if not eliminate it altogether—to more accurately reflect today’s increased longevity.
Future Wealth’s View
The fact is that no one should be forced to pull money out of an IRA while they are still working. When combined with a paycheck, these distributions can substantially increase taxable income. Of course, very few even ponder about that impending tax bill until they get closer to the age when the day of reckoning arrives.
But, the savvy investors with good advisors figure out that there are ways to mitigate the impact of RMD when it happens. When one is earning well and stashing money into his 401k and IRA to get the tax deductions, all is well. But, when the income dries out when one retires and tapping into his 401K means paying a hefty tax bill as well, things don’t look so rosy.
Here’s where the real value of the financial advisor comes into play. Through judicious planning, it is possible that RMDs doesn’t have to mean hefty tax bills. Shifting money into Roth IRAs and reducing the IRA/401K balance is one strategy. Another one is to take money out of IRAs/401ks ahead of RMD age.
But, like the saying goes – nothing comes easily.