While a new law increases the age you must withdraw from certain retirement accounts, there are two ways to delay that requirement even longer.
This year, seniors must take their required minimum distribution, or RMD from IRAs, 401(k)s, and 403 (b) plans at 73, up from 72 — thanks to retirement legislation President Biden signed in December. That will extend even further to age 75 in 2033.
By delaying withdrawals, your investments continue to grow tax-free, and you continue to sock more tax-deferred dollars away. So waiting even longer can be a financial boon for those who can afford it.
Here’s how that can happen.
Skirting the RMD
One exception that may let you push your RMD from an employer-sponsored 401(k) or (403(b) plan even further down the line is simply not retiring.
If you continue to work past age 73 and do not own more than 5% of the business you work for, most employer plans allow you to defer your RMD until April 1 of the year after you retire from that employer’s plan, according to IRS Publication 575.
The IRS has no clear rules on the number of hours you need to work for you to use the still-working exemption, so a part-time position as you phase into retirement may work if your employer considers you an active employee.
But it can get tricky. As mentioned, you can’t avoid your RMD if you own more than 5% of the company. And that’s not as straightforward as it seems. For example, it’s not just your personal ownership in a business; any ownership in the business by a parent, spouse, child, or grandchild also is included in determining whether you meet that criteria.
And when you decide to retire officially will make a difference in when your RMD must start. Timing matters. If you’re planning to retire at the end of the year, try to push your departure ahead to January. That way, you can push back starting your RMDs until April 1 of the next calendar year.
Of course, you’ll need to check your 401(k) plan provisions with your human resources department and run it by a tax professional.
Here’s an important caveat: The pause button does not apply to all pre-tax funded retirement accounts — only to your current employer’s plan. So you’re still on the hook to take an RMD from any IRAs (including SEP and SIMPLE IRAs) or any tax-deferred retirement accounts you own in a former employer’s plan.
To Roth or not to Roth
Another strategy to steer clear of the RMD rule is to convert a traditional IRA, or part of it, into a Roth IRA. A Roth IRA doesn’t have required minimum distributions during the lifetime of the original owner and your heirs may inherit the assets tax-free. Plus, there are no income restrictions on who can convert eligible IRA assets.
“Many taxpayers do Roth conversions between retirement and when they must take RMDs when they’re in lower tax brackets,” Ed Slott, a certified public accountant in New York and an expert on IRAs, told Yahoo Finance.
There are, however, big factors to consider.
With a Roth conversion, you pay federal income taxes now on the conversion amount, but none on any future earnings as long as when withdrawals are taken, the account has been open for five years and you’re age 59½ or over, or disabled. If you haven’t met the requirements, you’ll get hit with a 10% penalty on top of the tax.
Some key conversion considerations: If you expect higher taxes down the road, this could be a win for you. The timing could also align if your taxable income has dropped or your retirement accounts have taken a dive in value, which may have happened over the last year.
That said, the upfront cost can be considerable since you’ll pay federal income taxes on the conversion now. Weigh your options carefully.