New retirement rule is a boon for wealthy seniors

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The new retirement rules in legislation signed into law by President Biden in December include a handful of changes to required retirement account withdrawals that are winning big among well-heeled seniors.

The new law raises the age at which you must begin paying required minimum distributions, or RMDs, from individual retirement accounts (IRAs), 401(k) and 403(b) plans from 72 to 73. the year. This requirement will jump to 75 years in 2033.

Another provision eliminates RMDs from Roth accounts in Employer 401(k) plans beginning in 2024.

“For wealthy clients, this is good news because they typically don’t need an RMD,” Eileen O’Connor, certified financial planner and co-founder of Hemington Wealth Management, told Yahoo Finance. “And since these distributions are all taxable income, [that] they can push them into higher tax brackets.”

But for everyone else, increasing RMDs does little for financial security in retirement.

The amount of money you need to withdraw each year is based on an IRS calculation based on your account value and life expectancy.

For people who don’t rely on the money in their retirement accounts to pay for their living expenses, having to withdraw funds from tax-sheltered accounts like IRAs and 401(k) plans each year that starting from a government mandated age is not financially beneficial. .

For these retirees with many other sources of income to support their lifestyle, the ability to continue to accumulate tax-deferred savings can be an important factor in their future financial security and even for their heirs. theirs.

Here’s why: Most Americans can live in retirement for three decades. According to a 2022 Gallup poll, the average retirement age among retirees is now 61, up from 57 in 1999. And the average life expectancy among non-retirees is now 66, down from 60 in 1995. The greater the chance that they will not survive. .

(Getty Creative)

However, the truth is that most workers will need their savings sooner rather than later.

“That’s probably about a third of households that have accumulated significant retirement dollars,” Mark Miller, a retirement expert and author of the new book “Retirement Reboot: Commonsense Financial Strategies for Getting Back on Track,” previously told Yahoo Finance.

This leaves two thirds who have not done so.

In fact, an alarming percentage of workers are using their retirement savings before they retire, according to the latest Transamerica Retirement Worker Survey. More than 1 in 3 workers (37%) took a loan, early payment and/or hardship payment from their 401(k) or similar plan or IRA, which can have costly consequences.

And for those already taking their RMDs, only a fraction raises the minimum.

“According to Treasury Department statistics, 8 out of 10 people who are required by the RMD are already taking more than the minimum because they need the money,” Slott said.

The stark reality is that “it’s a very small percentage of people who really benefit from the switch to RMDs,” Alicia Munnell, director of the Center for Retirement Research at Boston College, told Yahoo Finance. And most of those people are those who can already afford their retirement, not those who are struggling in their golden years.

“I think it’s a terrible provision because it’s only meant to make rich people richer,” Munnell said. “Who can afford to wait? Only people who have a lot of money.”

Kerry is a senior reporter and columnist at Yahoo Finance. Follow her on Twitter @kerryhannon.

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