This week, I’m talking about the SECURE Act - a massive, 1,773 page piece of bi-partisan legislation that was signed into law in December 2019, and it brings sweeping rule changes with IRA and 401k accounts that will likely impact you, so that’s what I’m focusing on this week.

Today, I’m talking about my favorite provision in the SECURE Act - the RMD age increase to 72. If you aren’t familiar with RMDs, it stands for required minimum distributions. Basically, forced withdrawals from your IRA and 401k accounts once you reach a certain age.

Under the old rules, the age where you had to start taking those RMDs was 70 ½. But now, that age increases to 72. 

Here’s what this means for you...a bigger window to make Roth conversions just opened up, and this is an important planning tip that could potentially save you a substantial amount in taxes, so stick with me here while I explain this. 

Many people will retire before reaching age 72. So let’s say you retire at age 65. If you don’t have to start taking those RMDs until age 72, you now have a 7 year window before those RMDs start to convert money to a Roth. 

Here’s why this matters. Once you retire, your income is likely to drop - often substantially. And those years when your income is much lower present a unique opportunity to convert money in an IRA to a Roth. See, every dollar that you convert to a Roth from your IRA is included in your taxable income for that year, but if your income has dropped substantially, the tax bite on those conversions will be lower than had you converted while you were still working and presumably had higher income. 

Let’s say that over that 7-year time span, you were able to convert $150,000 to a Roth from your Traditional IRA. This is important because you just put that money into an account that will never be taxed again, and it means that the size of your Traditional IRA is now $150,000-$200,000 smaller than it otherwise would have been - making your future RMDs lower by thousands of dollars every year. 

So in summary, by taking advantage of Roth conversions in those lower-income years and paying the taxes one time, you’ll set yourself up for more flexibility and potentially lower taxes over the long-run by getting those Traditional IRA dollars into a Roth. 

That’s it for today. Thanks for listening. My name is Ashley Micciche and this is the One Minute Retirement Tip. 

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