New retirement rules in legislation signed by President Biden in December contain a handful of changes to required withdrawals from retirement accounts that score big brownie points with well-heeled seniors.
The new law ramps up the age you must start withdrawing required minimum distributions, or RMDs, from individual retirement accounts (IRAs), 401(k)s, and 403 (b) plans, to 73 this year, up from 72. That requirement will leap to age 75 in 2033.
Another provision eliminates RMDs from Roth accounts in employer 401 (k) plans starting in 2024.
“For wealthy clients, this is good news because they typically do not need the RMD,” Eileen O’Connor, a certified financial planner and co-founder of Hemington Wealth Management, told Yahoo Finance. “And because these distributions are all taxable income, [that] can push them into higher tax brackets.”
But for everybody else, the increase in RMDs doesn’t do much to help their financial security in retirement.
The amount of money you’re mandated to take out each year is based on an IRS calculation determined by your account value and life expectancy.
For folks who aren’t depending on the money socked away in their retirement accounts to pay for living costs, being forced to cash out funds from tax-sheltered accounts like IRAs and 401(k) plans each year, starting at a government-mandated age, isn’t financially beneficial.
For these retirees with plenty of other sources of income to fund their lifestyle, the opportunity to keep accumulating tax-deferred savings can be a significant factor in their future financial security and even for their heirs.
Here’s why: Many Americans may find themselves living three decades in retirement. The average age of retirement among retirees is now 61, up from 57 in 1999, according to a 2022 Gallup poll, And the average expected age among non-retirees is now 66 versus 60 in 1995. The longer people can keep their money invested and growing the greater chance they won’t outlive it.
The truth, though, is most workers need any money they have saved earlier rather than later.
“That’s probably about a third of households who have amassed significant dollars to use in retirement,” Mark Miller, a retirement expert and author of the new book “Retirement Reboot: Commonsense Financial Strategies for Getting Back on Track,” previously told Yahoo Finance.
That leaves two-thirds who haven’t.
In fact, a troubling percentage of workers tap into their retirement savings before they retire, according to the findings of the latest Transamerica Retirement Survey of Workers. More than 1 in 3 workers (37%) have taken a loan, early withdrawal, and/or hardship withdrawal from their 401(k) or similar plan or IRA, which can come with expensive consequences.
And for those who are already taking their RMDs, only a fraction withdraw the minimum.
“According to the Treasury’s statistics, 8 in 10 of the people subject to RMDs are already taking more than the minimum because they need the money,” Slott said.
The stark reality is that “it’s a very small percentage of people that really benefit from the change” to RMDs, Alicia Munnell, director of the Center for Retirement Research at Boston College, told Yahoo Finance. And most of those people are those who can already afford their retirement, not those struggling in their golden years.
“I think it’s a terrible provision because it’s designed just to make rich people richer,” Munnell said. “Who can afford to wait? Only people who have lots of money.”