Earlier this week, the House passed the bill, which delays until 72, the age at which retirees must start withdrawing from 401ks and individual retirement accounts and removes the age limit at which taxpayers must stop contributing. Currently, taxpayers have to stop contributing to such accounts at age 70 1/2 and begin taking distributions.
If passed by the Senate, this bill will be the most significant change to retirement plans since 2006, when the Congress first allowed employers to automatically enroll 401K plans and allow participants to shift from stocks to bonds as people age.
Given that the bill passed 417-3 in the House, it is all but certain that the Senate is unlikely to thwart this bill from passing and becoming law.
Future Wealth’s View
As if IRA and Roth IRA did not provide enough benefits already, extending the age to 72 is a further icing on the cake for all of us. It is highly likely that each of us, barring an unfortunate event, will live to be 90 years or more. And it is more likely than not, that each one of us will also continue to be productive well into our 70s.
And so, preparing to benefit from the extension of the age limit for RMD (required minimum distribution) makes a compelling case for accelerating the contribution to one’s Roth IRA account. Even though one can continue to contribute to IRA beyond the previous limit, Roth IRA contributions become even more important because the RMDs will be higher and that means more to pay in taxes. That also means that keeping orphan 401Ks in all the previous companies that one has been employed, is a bad idea.
Ideally, one should have majority of their IRA or 401K slowly but surely moved to Roth IRA by the time they get to be 72 so that there is not much tax to pay when RMD finally hits and the rest of their lives is simply spent enjoying the fruits of hard earned years. And, if you are thinking you can’t contribute or transfer to a Roth IRA, think again. The law has already provided a loophole for that. It is not often that the Congress provides these phenomenal opportunities – take advantage of it.