This New Retirement Rule Could End Up Costing You Big Money

A senior couple looks worried as they read financial statements.
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New retirement legislation increases the age you must eventually withdraw from your retirement accounts — but doing so could end up costing you.

On Dec. 29, 2022, President Biden signed a bill into law (SECURE 2.0 Act) which delays the age at which you must start taking required minimum distributions (RMDs) from IRAs, 401(k)s and 403(b) plans to 73 this year — up from 72, reports Yahoo News. The age requirement will increase again in 2033 (to 75), allowing investments to grow tax-free for a longer period of time.

According to the IRS, RMDs are typically calculated for each account by dividing the prior Dec. 31 balance of that retirement account by a life expectancy factor. There are several different life expectancy tables that the IRS updates regularly, and the one you use depends on your situation.

This means that the longer you postpone your RMD, the larger required annual withdrawals you may have later in life. This could push you into a higher tax bracket that may affect what you pay in taxes for Social Security or for your Medicare premiums, Yahoo News reported, and it could also create more tax troubles for heirs.

For example, if you file a federal tax return as an individual and your combined income is between $25,000 and $34,000, you may have to pay income tax on up to 50% of your Social Security benefits, per Yahoo News. If it’s over $34,000, up to 85% may be taxable.

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“The more you push back on the RMD age, the shorter that window to get all of that money out becomes,” Ed Slott, CPA and expert on IRAs, explained to Yahoo Finance. “And as you stuff more income into a shorter time period, overall you and your beneficiaries are going to end up paying more in taxes.”

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