Roth IRA or RMDs? How to secure your assets for the future!

Roth IRA or RMDs? How to secure your assets for the future!

What does it mean for retirement planning if the rules for minimum distributions for all retirement plans change? An important question that concerns many people not only in Bavaria, but throughout Germany. Because the US Treasury Department and the IRS published new regulations on July 18, 2024 that will have far-reaching consequences on the issue of required minimum distributions (RMD). The changes introduced by the SECURE legislation and its successor, the SECURE 2.0 Act, significantly impact retirement plan owners and their beneficiaries. This is what colleagues from report about IRS, the rules have changed in part due to suggestions from the public, but the majority of the regulations remain unchanged compared to previous drafts.

So what should investors prepare for? In sum, RMD reform means that the requirement to make minimum withdrawals from pre-tax retirement accounts, such as traditional IRAs and 401(k)s, begins at age 73 (up from age 72 under the SECURE 2.0 Act) and increases to age 75 by 2033. What's particularly interesting, however, is that Roth IRAs are exempt from these minimum distributions during the lifetime of the original owner. Starting in 2024, these benefits will also apply to Roth 401(k)s. This means that many investors have an incentive to convert their traditional retirement accounts into Roth accounts in order to secure tax-free income for their heirs.

Understand the tax implications

An example illustrates the tax implications of a conversion: An investor might consider converting a $680,000 401(k) plan into a Roth account in five equal portions. This would result in a tax bill of about $127,440 over five years, leaving an after-tax Roth IRA value of $552,560. This type of planning not only allows for better tax administration, but also an attractive transfer of wealth to the next generation. This means: If you plan wisely, you will do good business for yourself and your family.

It's also important to note that RMDs are calculated based on age and account balance. In our example, a 75-year-old with a million dollar account would have an RMD of $40,650 for 2026. It's also worth noting that RMDs can be aggregated for traditional IRAs, but must be calculated separately for 401(k) plans. This requires careful planning to avoid an unnecessary increase in the tax burden.

The most important things at a glance

• RMDs beginnen bei 73 Jahren (ab 2033 75 Jahre).
• Roth IRAs sind von RMDs während der Lebenszeit der Eigentümer ausgenommen.
• Die Umwandlung in ein Roth-Konto hat steuerliche Konsequenzen, die gut durchdacht sein sollten.
• Die neuen IRS-Vorgaben spiegeln umfassende Reformen zur Altersvorsorge wider.

The decision to convert an account should always be based on personal financial goals, such as estate planning and tax optimization. The changes and new regulations are another step towards giving pension plan participants more choice and control. It is therefore advisable to familiarize yourself with the new circumstances at an early stage and, if necessary, seek professional advice.