Today, I’m going to step away from my work focusing on markets and investments to talk to you about something that will likely impact many of you.

As a Certified Financial Planner, CFPⓇ I keep my eye on any major developments in the planning world, just in case something comes along that I think you should know about.

For those of you retired or nearing retirement, pay attention, as Congress just handed you a gift in the form of sweeping year-end tax legislation.

At the close of 2022, President Biden signed into law The Secure Act 2.0. It’s actually the sequel to the original Secure Act of 2019.

Included in version 2.0 are changes to retirement plan distribution dates and how beneficiaries must remove funds from inherited IRAs.

There are many more provisions included in the act, but for today, let’s just focus on these two new provisions.

Among the legislative changes included in 2.0 is the date in which retirement plan participants (anyone who invests in an IRA, a 401k, or another retirement plan) are required to begin distributions – called required minimum distributions (RMD). 

Prior to the passage of the Secure Act, the beginning date that IRA owners and plan participants were required to begin removing funds from retirement accounts had been age 70 ½. That date increased with the passage of the Secure Act and has now increased yet again with Secure Act 2.0

These annual distributions (RMDs) are based on your age and represent the amount you must distribute from your retirement accounts and pay taxes on. RMDs were only created for one purpose. 

You see, as much as congress wanted to incentivize saving for retirement via the creation of 401ks, IRAs, SEP, etc, they never intended IRAs to grow in perpetuity. They expected investors to take money out during retirement – resulting in tax revenues back to the government. 

The only way to make sure that happened was to force investors like you and me to take money out of tax-deferred savings by way of a required minimum distribution after a specified age.

All that growth inside your retirement plan or IRA has never been taxed. But it will be when you begin taking money out annually – whether you like it or not.

That brings us back to today. The latest tax reforms, ushered in with the passage of Secure Act 2.0, are a gift, allowing many of you to delay a visit from the tax man for a little longer.

One of the important provisions of Secure 2.0 allows retirement plan participants to delay withdrawals from their IRAs and 401(k)s from the current age of 72 to age 73 beginning in 2023, and age 75 in 2033. 

How does that benefit you now? Well, based on your current age, you may be eligible to delay a mandatory distribution. 

Meaning, you can now reduce your taxes by avoiding taking money out of your retirement plans.

Vanguard estimates 25% of its clients don’t take money from retirement accounts until they’re required to by law.

How much the IRS requires you to take out each year is based on the account balances of your retirement plans as of 12/31 of the previous year and your age. The IRS has a special life expectancy table used to determine the year’s required distribution.

I don’t want to go too far down the proverbial rabbit hole with all the tax talk, but there are special penalties applied to amounts you should have taken out but didn’t. So even though the penalties have been greatly reduced (from as high as 50%), you still want to be sure your RMDs have been calculated properly and taken as required.

And remember, you can always take more than the minimum required, but if you don’t take enough, it’ll cost you.

Just because you can delay longer doesn’t mean you should. 

Remember, you’re only delaying taxes, not avoiding them altogether. They’re not going away.

On the surface, the idea of delaying taking money out of taxable retirement accounts may sound like a home run, but you still want to think it through.

You may create a larger tax burden for yourself next year or the year after when you do have to take mandatory distributions – and that additional income may be enough to bump you up to a higher tax bracket, causing unintended tax implications. 

And don’t forget, the money coming out of that IRA is not taxed as a capital gain (at lower rates). It’s taxed as income (at possibly higher rates).

You also have heirs to think about. You may create large tax liabilities for your heirs when they inherit your retirement plan assets. 

The larger the plan, the more money that needs to be distributed, the more taxes to pay. Which brings us to another important provision of the Secure Act 2.0.

Under the original Secure Act (2019), non-spousal beneficiaries (anyone other than your spouse who inherits retirement accounts) have only 10 years to take all the money out of the IRA after the original account holder dies (for deaths after 2019). 

If you, as the IRA owner, chose to delay distributions from your IRA as long as you can, it could mean bigger distributions for your children down the road, which is not a bad problem to have. 

However, if Murphy’s Law has anything to do with it, it will come during their highest-earning years when they would be subject to the highest income tax rates – on their money and yours!

But, one possible advantage of delaying distributions is that it may give IRA owners more time to convert some IRA assets to a Roth IRA. 

This is a strategy we’ve used many times so you’re moving from the taxable world with required distributions to the tax-free world without required distributions.

With a Roth IRA, you pay tax upfront with the benefit being on the backend, as withdrawals are tax-free after the age of 59 ½, as long as the money has been in the account for at least five years. 

Roth IRA account owners aren’t subject to required minimum distributions, so the account can continue growing tax-free for your heirs. 

And Roth IRAs are generally more advantageous for heirs, too, because they don’t have to pay taxes on withdrawals if the money has been in the account for five years. 

So although money has to be withdrawn from the Roth account by your heirs, it does not create an additional tax burden for the beneficiary.

Obviously, each of your needs and situations will differ, so it isn’t a one-size fits all strategy. There are always trade-offs to consider.

Thinking through how these decisions will impact you and your heirs will help you make the best decision for you and your family.

There are many other provisions contained in the Secure Act. I just wanted to share one or two provisions that may have the biggest impact on our readers. To learn more, we recommend checking out the IRS’s Retirement Account section.

And as a friendly reminder, before making any tax decisions, it’s always a good idea to consult with your tax professional.