Plan a longer retirement

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401(k)s in the workplace and traditional IRA Accounts are wonderful vehicles for long-term savers because they offer tax deferral. By deferring taxes on dividends, capital gains and interest income, investors can keep more of their money over time, resulting in higher overall returns. The problem is, Uncle Sam will only let you defer those taxes for so long. Finally, the IRS will force you to withdraw money from accounts even if you don’t need it.

When an investor reaches the age of 72, the IRS requires you to take what are called required minimum distributions (RMDs) from their traditional IRAs and 401(k)s. The amount you need to withdraw is based on your account balance at the end of the previous year and your life expectancy based on your age. This amount withdrawn is then taxed as an ordinary income rate.

Savers received some good news at the start of the year. For the first time in 20 years, the IRS has updated its minimum required distribution boards. The verdict? You will live longer. Below IRS Bulletin 2020-49, the agency has reduced average life expectancy by more than two years. According to the new set of tables, life expectancy is now 84.6 years, compared to 82.4 years in the old table.

The good news is that since you are expected to live longer, the IRS expects a longer track to withdraw taxes from your account. As such, 401k and IRA RMDs are now lower as a percentage for retirement savers. The difference can be significant. the morning star gives this example: a 77-year-old married woman with a capital of 1 million dollars IRA would have a MDM of $47,169.81 under the old table. The new table reduces the MDM at $43,668.12. That’s enough to keep you in a lower tax bracket.

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