The Secure Act 2.0 has changed retirement planning once again. Starting in 2023, retirees must begin withdrawing from non-Roth retirement accounts at age 73, and this will increase to age 75 in 2033. If you’ve already started required minimum distributions (RMDs), you can’t stop. While raising the withdrawal age offers more planning opportunities, it doesn’t mean delaying IRA distributions is the best choice for everyone.
For those born between 1951 and 1959, you can delay taking money from retirement accounts until age 73. However, just because you can delay doesn’t mean you should. Here are some tax planning strategies to consider for when to start drawing from your IRA.
Tax planning shouldn’t end when you retire. If you’re in a low tax bracket, you have several options. For example, consider a married couple who recently retired and are living on cash savings this year, with no other taxable income or deductions. In 2024, they could report regular income of $94,300 and stay in the 12% tax bracket. If they expect future RMDs to push them into the 24% tax bracket, this strategy helps reduce the amount taxed at the higher rate. Remaining funds can be invested in a brokerage account. Additionally, tax rates are set to increase in 2026 when the Tax Cuts and Jobs Act provisions expire.
Another strategy is converting money from a traditional IRA to a Roth IRA. The couple could convert the same amount as in the previous example, but by investing in a Roth IRA, they avoid annual taxes and enjoy tax-free withdrawals if holding periods are met.
If the couple also has a taxable brokerage account, they might consider a blended withdrawal strategy to benefit from favorable long-term capital gains tax rates. For instance, they could convert $50,000 to a Roth IRA and realize $39,000 in long-term capital gains. In 2024, married couples fall into the 0% tax bracket with income under $94,050. They could reinvest the proceeds immediately, keeping in mind their overall asset allocation and tax-loss harvesting rules. In their brokerage account, newly invested cash would start with a fresh holding period and cost basis.
The original Secure Act in 2019 ended the ‘stretch IRA’ for non-spouse beneficiaries. Now, adult children inheriting a retirement account from a parent must withdraw the money within 10 years, and the IRS may require annual distributions during this period. While Roth account beneficiaries still enjoy tax-free distributions, heirs of pre-tax IRAs could face high marginal tax rates after inheriting large accounts. This contrasts with most brokerage accounts, which receive a step-up to fair market value at death.
Retirees shouldn’t sacrifice their enjoyment just to minimize their heirs’ tax bills, but in some cases, it’s another reason not to delay taking money from retirement accounts. Before deciding to delay RMDs, discuss your situation with your financial and tax advisor. The most tax-efficient strategy usually involves a multi-year approach to shifting asset buckets. Even if re-bucketing your portfolio isn’t advantageous, it’s beneficial to review your strategy annually due to frequent changes in tax laws and your financial situation.