The passage of the Secure Act 2.0 in December of 2022 pushed back Required Minimum Distribution (RMDs) from age 72 to age 73 in 2023 (and age 75 in 2033). While proponents of this move argue that it provides advantages, such as allowing individuals more time to accumulate wealth in their retirement accounts, others warn that it could be a tax trap. Below we explore the potential pitfalls and drawbacks of this delay.
More Income Tax and Higher Medicare Premiums
While proponents argue that individuals will have more time to accumulate wealth in their retirement accounts without being required to withdraw a specific amount each year, it’s important to remember that RMDs are subject to income tax. By delaying the distributions, you risk ending up with significantly larger distributions in the future, resulting in higher tax liabilities when you eventually begin taking withdrawals. This could potentially push you into a higher tax bracket, increasing your overall tax burden and possibly negatively impacting what you pay for your Medicare premium as this is always based on your taxable income from two years prior.
Higher Tax on Social Security Benefits
If you have taxable income as well as Social Security benefits, such as your RMD, that can affect how much your Social Security benefit is taxed. If your adjusted gross income is more than $25,000 for single filers ($32,000 for joint filers), your Social Security payments can be taxable. If an eventual RMD will trigger that tax, an earlier withdrawal from your account may be the better move.
Consequences for Beneficiaries
Delaying RMDs could have unintended consequences for beneficiaries of inherited retirement accounts. Under current rules, non-spouse beneficiaries must withdraw the funds within ten years of the account owner’s death. This means that heirs who inherit the deceased owner’s account must distribute the entire account in 10 years. If those heirs are in their prime working years, they could likely pay a federal tax rate of 24% to 37%, plus another 3% to 12% in state income taxes. And the distributions could push their “other income” above the income thresholds ($200,000 for single filers and $250,000 for joint filers). By delaying RMDs, you could be dumping a hefty tax bill on your heirs.
