In late 2022, the SECURE Act 2.0 became law, with wide-ranging changes to 401(k) provisions including immediate and future adjustment to the age that Required Minimum Distributions (RMDs) take effect:

  •  Beginning in 2023, RMD start age increases from 72 to 73
  •  Beginning in 2033, RMD start age increases from 73 to 75

The original SECURE Act pushed the RMD age from 70½ to 72, and this latest change provides another valuable opportunity for Americans to better manage their finances and enjoy a more secure (no pun intended) retirement. (Since many Americans want to retire at a later age, the delay from 70 ½ to 73 and ultimately 75 helps Americans to continue with their careers while saving more for retirement.)

Here are a few reasons why the start age of 73 for RMDs (and for those young enough, eventually, age 75) is beneficial:

Extended Tax-Deferred Growth: One of the primary advantages of the new RMD requirement is the opportunity for retirement accounts to continue growing tax-deferred from age 70 1/2 to 73. This extended growth period can lead to more savings and potentially reduce the risk of running out of money in retirement.

Tailored Withdrawal Strategies: Retirees can use the extra 1 to 3 years to consult with financial advisors and develop personalized withdrawal strategies that align with their specific retirement goals and circumstances.

Reduced Tax Burden: By delaying RMDs an extra year (or three), retirees can potentially reduce their annual tax liability. This provides an opportunity to implement tax-efficient strategies before RMDs kick in, and helps ease the transition into retirement by providing more time to assess income needs and align financial resources accordingly.

Delayed Impact on Medicare: Medicare’s Income-Related Monthly Adjustment Amount (IRMAA) policy applies Modified Adjusted Gross Income (MAGI)-based surcharges to retirees, which can add up to tens or hundreds of thousands of dollars throughout one’s lifetime. RMDs count towards MAGI calculations, so extra time before they kick in can provide a reprieve from Medicare surcharges. Calculations are based on a two-year lookback, so retirees in 2023 are paying surcharges based on their 2021 MAGI, which also includes a portion of one’s Social Security benefit, capital gains, IRA distributions, and pension income (public or private) among other income sources.

Below are the RMDs for a retiree turning 73 in 2024, based on their IRA Balance.

  • $100,000 balance: $3,774 RMD
  • $250,000 balance: $9,434 RMD
  • $500,000 balance: $18,868 RMD
  • $750,000 balance: $28,302 RMD
  • $1,000,000 balance: $37,738 RMD

It’s crucial for Americans approaching retirement age to understand the significance of RMDs, and it’s equally important to note that it also requires careful planning to ensure a smooth transition into retirement. With the help of a financial professional, it is likely that a client’s MAGI income bracket can be reduced by potentially modifying product mix. For example, some or all income from non-qualified annuities, life insurance, HSAs and any type of Roth does not fall under MAGI. Note that someone earning $103,001 in MAGI will pay the full surcharge for individuals earning between $103,000 and $129,000. Therefore, everyone should review their retirement investments options based on income requirements and tax implications.