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New RMD Age Of 72 Could Offer Big Tax Savings! - YouTube
Channel: True North Retirement
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If you turn 70 and a half this year and
you weren't too excited about taking
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your first required minimum
distribution from your IRA account,
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guess what? You are in luck
because the secure act,
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which was just signed into law in
December of 2019 extended the age that you
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have to start taking those required
minimum distributions or RMDs,
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extended the age to 72 there are several
planning opportunities that now exist
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because this age has been extended and
that's what I'm talking about in today's
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video.
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[inaudible]
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so here's what changed for you.
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Basically prior to 2020 you had to start
taking mandatory forced withdrawals
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from your IRA once you reached
the age of 70 and a half.
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Here's what's not so great
about IRA accounts. Well,
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the beauty of an IRA or a 401k
account is that you put money in.
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If it's a traditional IRA,
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you're going to get a tax deduction on
the contribution that you make and then
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that money grows tax free from that point
forward until you start taking money
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out of the account. And then uncle Sam
comes to you with his hand out and says,
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okay, I've been your tax partner all
along. You haven't paid any taxes.
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I want my money.
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Now of course you take money out and
you'd have to pay the taxes at your income
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tax rate based on those distributions.
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So every year when you have to
start taking those required minimum
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distributions,
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that that lump sum amount or the
monthly amount that you take out,
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it gets added to your
annual income for the year.
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And it's used to calculate
what your overall income is.
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So you pay taxes on the distributions,
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the higher income increases the
overall potential for taxation.
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And it's just, it's honestly
not fun to have to pay taxes.
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So here's what this means for
you from a planning perspective.
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So because you can wait,
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you don't have to take those distributions
and then pay the taxes on them until
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you are 72.
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So in some cases it might make sense to
take withdrawals from other accounts if
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you need that money.
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In other situations as we'll
talk about in a subsequent video,
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maybe it might make more sense to take
those IRA distributions out first.
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So it just depends on your situation.
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Another really important
planning opportunity here
is to convert money in your
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traditional IRA to a Roth. Now
you now have longer to do this.
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Let's say you retire at 65,
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you don't have to start taking
those RMDs out until you're 72.
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So you have seven years to try to convert
as much money into a Roth as possible.
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And what this does is that the bucket
of money that's in your traditional IRA,
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as you make those conversions, it
shrinks every year as you do that.
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So that when you turn 72 and you
have to now start pulling money out,
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it's a smaller bucket,
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hopefully if you were able to
convert a substantial amount,
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it's a much smaller bucket than what you
would have otherwise done had you not
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taken advantage of Roth conversions.
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So there's usually the sweet spot for a
lot of people were in the early years of
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retirement. Your income goes down,
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so it makes sense to then convert that
money to Roth and pay the taxes on it to
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get it permanently out
of the traditional IRA
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so that when you have to start
taking those distributions at 72,
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it's now a smaller pot and the taxes,
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the future taxes will
potentially be lower.
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And the amount of money that you're
forced to withdraw every year will
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potentially be lower as well.
The other important tie in,
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and this ties into a future video that
I'm going to do that also relates to the
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secure act and the changes of the rules
is that if you are able to convert money
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and it makes sense to convert money from
your traditional IRA accounts to a Roth
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and you're able to do this maybe
potentially for several years in a row.
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Getting more money in the Roth also
potentially benefits your beneficiary.
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So when when your kids, if and when
your kids inherit those monies,
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they have more money from the Roth IRA
that they inherited than they otherwise
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would have and hence the taxes for
them because under the secure act,
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as I'll talk about in a subsequent video,
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they're going to be forced to take
distributions from the IRAs over a 10 year
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time period.
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I don't know about you but I would much
rather take money out of a Roth and not
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pay taxes on it versus taking money out
of a traditional IRA and potentially
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paying a lot of taxes on that.
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The bottom line here is that the extended
age of the RMDs to age 72 opens up
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this window of opportunity where now you,
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there are additional tax planning and
estate planning considerations that you
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may want to look at that maybe were
otherwise available to you before or in a
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way that made sense before. But
because the RMD age is now extended,
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maybe those opportunities are now
opened up to you. And at the very least,
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at least it offers you some additional
flexibility where you have another year
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and a half to two years where you're not
forced to take those withdrawals out of
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your account and you can take it
out of other accounts instead.
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Thank you so much for watching this video.
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My name is Ashley Micciche
and I will see you next time.
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