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A new law has pushed back the age when you have to withdraw money from tax-deferred retirement accounts. Even though you can take withdrawals later, you’ll have to deal with them eventually and plan accordingly. Fortunately, the new law also creates more flexibility for retirement savings.
The Securing a Strong Retirement Act of 2022 — more commonly called SECURE 2.0 — raises the age at which retirees are required to start draining funds from their tax-deferred accounts, such as individual retirement accounts (IRAs) and 401(k) plans. Until 2020, retirees were mandated to take required minimum distributions, or RMDs, by April 1 of the year after they turned age 70½. A 2019 law (the first SECURE Act) bumped that age up to 72. The newer law raises the age to 73, and that’s scheduled to go to 75 in a decade.
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For the majority of IRA and 401(k) owners who will depend upon their tax-deferred savings to support retirement spending, the option to delay RMDs will have little impact. But for a substantial share of savers who are well prepared for retirement, the combined effects of 2019’s SECURE and 2022’s SECURE 2.0 have elevated both the risks and rewards of smart planning.
The two acts’ changes affect “tax planning, income planning, estate planning and generational planning,” explains Nilay Gandhi, senior wealth adviser with Vanguard Personal Advisor Services. “Now savers need to plan even further ahead.”
How RMDs work
Understanding the changes requires starting with the basics of retirement saving. To encourage workers to prepare for old age, the federal tax code offers incentives for saving. Most workers save in tax-deferred, or “traditional,” accounts, and pay no tax on the dollars they put into a 401(k) plan or IRA. Interest, dividends and stock market gains on these accounts aren’t taxed until the funds are withdrawn in retirement.