You Shouldn’t Always Delay IRA Distributions

The Secure Act 2.0 just upended retirement planning…again. The age when retirees must begin drawing from non-Roth retirement accounts increases to 73 in 2023, then 75 in 2033. Individuals who have already started RMDs can’t stop. Raising the age when withdrawals must begin is great as it gives investors more planning opportunities. However, it doesn’t mean that delaying IRA distributions is the right move for everyone.

When should you start taking money from your IRA?

People born between 1951 and 1959 can delay taking money from retirement accounts in their own name until age 73. But just because you can doesn’t mean you should. Here are some tax planning strategies to consider before deciding when to start drawing from your IRA.

Tax planning strategies for required minimum distributions

Tax planning shouldn’t stop when you retire. Retirees in a low tax bracket for the year have several planning options to consider. For the following examples, consider a married couple who recently retired and are living on cash savings this year. For simplicity, assume they don’t have any other taxable income or deductions.

Taking withdrawals to fill up lower tax brackets

In 2023, the couple could report regular income of roughly $89,000 and stay in the 12% marginal tax bracket. If they expect required minimum distributions to eventually put them in the 24% tax bracket, this strategy will help them reduce the amounts that would ultimately have been taxed at a higher rate. Remaining funds can be invested in a brokerage account. Another factor to consider: Tax rates are set to increase in 2026 when the provisions of the Tax Cuts and Jobs Act expire.

Targeted Roth conversion strategy

Another approach might be to convert money from a traditional IRA to a Roth IRA. The couple could convert the same amount as in the earlier example, but by investing the money in a Roth IRA, they won’t be subject to annual taxes like in a brokerage account and withdrawals will be tax-free assuming holding periods are met.

Adding tax diversification to your income stream

If the couple also has a taxable brokerage account, they may want to consider a blended withdrawal strategy to utilize favorable long-term capital gains tax rates. For example, perhaps the couple converts $50,000 to a Roth IRA and realizes $39,000 in long-term capital gains.

In 2023, married couples fall into the 0% tax bracket for long-term capital gains with income under $89,250. The couple could reinvest the proceeds right away (being mindful of their overall asset allocation and tax-loss harvesting rules). In their brokerage account, newly invested cash would start with a fresh new holding period and cost basis.

Long, long-term tax planning

The passing of the original Secure Act in 2019 effectively marked the death of the “stretch IRA” for non-spouse beneficiaries. Now, when adult children inherit a retirement account from a parent, they have to take the money within 10 years. The IRS may also require annual distributions during this window.

While beneficiaries of Roth accounts will still enjoy tax-free distributions, heirs of pre-tax IRAs could land in the highest marginal tax brackets after inheriting large accounts. This is in sharp contrast with the tax treatment of most brokerage accounts, which receive a step-up to fair market value at death.

This doesn’t mean retirees shouldn’t enjoy their success just to help ensure their heirs have the smallest tax bill possible, but in some situations, it’s another reason not to delay taking money from retirement accounts.

Putting it all together

Before deciding on delaying required minimum distributions, discuss your situation with your financial and tax advisor. Typically, the most tax-efficient strategy will involve a multi-year approach when shifting asset buckets. Even if it isn’t advantageous to re-bucket your portfolio, due to the frequent changes in tax laws and your financial situation, it’s beneficial to have an annual review.