Most of us know that in retirement, you will be subject to RMDs or Required Minimum Distributions from your qualified retirement accounts, such as a 401K, 403B, traditional IRA, SEP IRA, Simple IRA, etc. The actual RMD amount is calculated by dividing your retirement account’s year-end market value (December 31st) by a factor listed in an IRS table.[i] Roughly speaking, the first year distribution is around 3.6% of the year-end balance, and the distribution percentage goes up annually as you get older.
Prior to 2019, the RMD age was 70 ½ . However, that changed with the passage of The Secure Act of 2019, which increased the RMD age from 70 ½ to age 72. Then in December 2022, Secure 2.0 was passed, further increasing the RMD age. Under the newest rules, those born on January 1, 1951 through and including December 31, 1959 will not be required to take RMDs until age 73. Further, those born on January 1, 1960 or later will now be deferred to taking RMDs at age 75!
Theoretically, pushing the RMD age back allows Boomers to work longer without worrying about making too much income from the combination of working income and RMDs at the same time. For those who retire earlier than their RMD age, the period between retirement and your RMD age might provide an ideal opportunity to consider transfers from your Traditional IRA to a Roth IRA. This Roth Conversion strategy is popular when the stock market is down, like it is now. That’s because gains from market recovery inside a Roth IRA are tax-free to the owner. In addition, Roth IRAs are not subject to RMDs, allowing you to control your taxable income better in later retirement years. However, the initial conversion, or transfer, from your IRA to your Roth is taxed as ordinary income. Therefore consult your CPA or Certified Financial Planner™ prior to ensure this investment strategy makes sense for you.