While a new law raises the age at which you must withdraw money from certain retirement accounts, there are two ways to delay that requirement further.
This year, seniors must take their required minimum distribution, or RMD from IRAs, 401(k) and 403(b) plans at 73, instead of 72, thanks to retirement legislation President Biden signed in December. That will extend further to age 75 in 2033.
By delaying withdrawals, your investments continue to grow tax-free and you continue to save more dollars tax-deferred. So waiting even longer can be a financial boon for those who can afford it.
This is how that can happen.
Bordering the MDR
One exception that may allow you to push your RMD from an employer-sponsored 401(k) or (403(b) plan even further down the line is simply not retiring.
If you continue to work past age 73 and own no more than 5% of the business you work for, most employer plans allow you to defer your RMD until April 1 of the year after you retire from that employer’s plan , according to the IRS publication. 575.
The IRS doesn’t have clear rules about the number of hours you need to work to use the continuous work exemption, so a part-time position as you near retirement may work if your employer considers you an active employee.
But it can be complicated. As mentioned, you cannot avoid your RMD if you own more than 5% of the company. And that is not as simple as it seems. For example, it’s not just your personal property in a business; Any ownership in the business by a parent, spouse, child, or grandchild is also included in determining whether it meets that criteria.
And when you decide to officially retire, it will make all the difference when you should start your RMD. Time matters. If he plans to retire at the end of the year, he may try moving his departure up to January. That way, you can delay the start of your RMDs until April 1 of the next calendar year.
Of course, you’ll need to verify the provisions of your 401(k) plan with your human resources department and have it executed by a tax professional.
Here’s an important caveat: The pause button doesn’t apply to all pre-tax funded retirement accounts, only your current employer’s plan. Therefore, you can still take an RMD from any IRA (including SEP and SIMPLE IRA) or any tax-deferred retirement account you held in a previous employer’s plan.
To Roth or not to Roth
Another strategy to avoid the RMD rule is to convert a traditional IRA, or part of it, to a Roth IRA. A Roth IRA does not require minimum distributions during the life of the original owner, and his or her heirs can inherit the assets tax-free. Plus, there are no income restrictions on who can convert IRA-eligible assets.
“Many taxpayers do Roth conversions between retirement and when they have to take RMDs when they’re in lower tax brackets,” Ed Slott, a New York-based certified public accountant and IRA expert, told Yahoo Finance.
There are, however, big factors to consider.
With a Roth conversion, you pay federal income tax now on the conversion amount, but none on future earnings, as long as withdrawals are made, the account has been open for five years, and you are age 59½ or more, or is disabled. If you have not met the requirements, you will receive a 10% penalty on top of the tax.
Some key conversion considerations: If you expect higher taxes in the future, this could be a win for you. The timing could also align if your taxable income has declined or your retirement accounts have plummeted in value, which may have happened within the past year.
That being said, the initial cost can be considerable, since you will now be paying federal income taxes for the conversion. Weigh your options carefully.
Kerry is a senior reporter and columnist for Yahoo Finance. Follow her on Twitter @kerryhannon.
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