Tens of millions of Americans use IRAs to help them save for retirement. Traditional IRAs allow many taxpayers to deduct the amount that they initially contribute, and then they get tax-deferred treatment on income and gains on their investments, as long as they remain within the IRA.
Unfortunately, all good things must come to an end, and for traditional IRAs, there comes a time when people must start taking required minimum distributions (RMDs) from their retirement accounts. Most withdrawals from traditional IRAs, including RMDs, get included in taxable income and increase your tax bill, so it's understandable why many people prefer to delay taking distributions as long as possible. However, some lawmakers in Washington hope to give retirees some extra time before they have to start taking money out of their retirement accounts.
The current RMD age: 72
Under current law, those who are 72 or older by the end of the calendar year have to take RMDs from their traditional IRAs, as well as 401(k)s or similar work-sponsored retirement plans. If you just turned 72 in 2022, then you can put off taking money out of your retirement accounts until April 1, 2023, but otherwise, the deadline is Dec. 31.
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Congress has made it very clear that it takes the RMD rules quite seriously. If you don't manage to take your RMD on time, you could face an IRS penalty of 50% of the amount you should have taken out of your retirement accounts.
What new proposals from Washington would do to the RMD age
If lawmakers don't pass any changes to the current law, the RMD age of 72 would continue to apply in 2023. However, Washington is considering a couple of proposals that would potentially lead to an increase in the age at which RMDs become mandatory.
Under the SECURE 2.0 bill, the RMD age would gradually move from 72 to 75. An immediate one-year increase in the RMD age to 73 would take effect for the 2023 tax year. It would stay there at 73 for several years before climbing to 74 in 2030. The last move would take place for the 2033 tax year, with a final boost to 75.
The SECURE 2.0 bill has already gotten the support of the House of Representatives, which passed it by a vote of 414 to 5. The result shows the bipartisan nature of the bill and the ability of the legislation's supporters to transcend party lines.
However, the Senate hasn't yet taken up the SECURE 2.0 bill. Instead, it's looking at a different version of the proposed legislation. Under what's called the EARN Act, retirees wouldn't see a boost in the RMD age anytime soon, with it remaining at 72 through 2031. However, for the 2032 tax year and beyond, the Senate version of the bill would skip all the intermediate steps of its House-passed counterpart and immediately raise the RMD age all the way to 75 in one fell swoop.
When taking IRA money earlier can be a good thing
There's no question that a higher RMD age gives you more choices in how you use your retirement savings. Even if the RMD age does rise, you might still want to consider taking distributions earlier than later.
For instance, most people see their taxable income plunge once they stop working. If you're in a low tax bracket, you might be able to take distributions and pay just 10% to 12% in federal tax on them. Doing that in your mid- to late-60s and early 70s can be smarter than taking nothing because it could reduce your RMDs and prevent you from paying higher tax rates of 22% to 24% or more.
Nevertheless, a higher RMD age puts the decision in your hands. For those who want their retirement savings to grow tax-deferred as long as possible, Washington's latest proposals are exactly what retirees want to see.
