The Secure Act 2.0, which was passed in December of last year, includes a change to the starting age for Required Minimum Distributions (RMDs). Previously, individuals were required to start taking distributions from their retirement accounts, such as traditional IRAs and 401(k)s, at the age of 72. However, with the new legislation, the starting age as been pushed back to 73 (and 75 beginning in 2033). While proponents of this move argue that it could be beneficial to some, it’s important to keep in mind the potential implications on Americans.

What Proponents Say

Supporters of the delay argue that it allows individuals more time to accumulate wealth in their retirement funds, as they can continue to benefit from the tax advantages and potential investment growth. This can be especially beneficial for those who are still active in the workforce and want to contribute to their retirement savings.

Additionally, proponents point out that delaying RMDs can simplify retirement planning for individuals who have multiple retirement accounts. More time allows them to consolidate their accounts, making it easier to manage their finances and track their RMDs accurately.

Higher Tax Liabilities

RMDs are subject to income tax. By delaying distributions, you could potentially end up with significantly larger distributions in the future, which could result in higher tax liabilities when you do begin taking withdrawals. As a result, the delay could possibly push you into a higher tax bracket and increase your overall tax load. Furthermore, because your Medicare premium is always based on your taxable income from the previous two years, delaying distributions could adversely impact your Medicare premium payments.

Social Security Benefits

As mentioned, RMDs are taxed as income, and taking a larger sum later could nudge you into a higher tax bracket. There are ripple effects from having a higher income, including how much of your Social Security benefits are taxed or losing out on certain deductions and credits if higher RMDs push you past income requirements. If your adjusted gross income is more than $25,000 for single filers ($32,000 for joint filers), your Social Security payments can be taxable. If a future RMD will prompt that tax, an earlier withdrawal from your retirement account may make the most sense.

Consequences for Heirs

Under current rules, non-spouse beneficiaries of retirement accounts must withdraw the funds within ten years of the account owner’s death. By extending the starting age for RMDs, individuals who pass away before reaching the new distribution age may inadvertently subject their heirs to more compressed withdrawal schedules. This accelerated distribution timeframe can generate higher tax burdens on your heirs, especially if they are still earning income in the workforce — your RMDs could push them into a higher tax bracket, which could result in greater overall taxes paid. By delaying RMDs, you could potentially diminish the intended benefits of inheriting a retirement account.