Have Money in an IRA? You Can Now Let It Grow Tax-Deferred for Longer

A big change should give you more flexibility.

One of the primary benefits of saving and investing in an IRA account is getting to enjoy tax-deferred growth on your money. When you invest in a regular brokerage account and sell stocks or other assets at a profit, you're liable for capital gains taxes the year you make that sale. With an IRA, you can defer your gains until retirement age so you're not paying taxes on them year after year. That allows your money to grow in a tax-advantaged manner without burdening you along the way.

But you can't grow your IRA forever -- at least not in full. Seniors today have to start taking required minimum distributions, or RMDs, from their traditional IRAs starting at age 72. 

RMDs are based on your account balance and life expectancy. But not taking one has severe consequences -- a 50% penalty. So if your RMD this year is $5,000 and you don't take it at all, you'll effectively throw away $2,500 in penalty form.

One big change, however, will allow younger IRA savers to benefit from a longer period of tax-deferred growth in their accounts. And that's a huge plus. 

RMDs are postponed for younger savers

You may have heard about a recently passed set of rules called SECURE 2.0 that impacts savers in different ways. Under SECURE 2.0, RMDs will not come into play for younger retirement savers until a later age.

Anyone who turned 72 in 2022 or earlier must follow the old rules. This means taking their first RMD no later than April 1, 2023. 

But those turning 72 between 2023 and 2033 (in other words, those born between 1951 and 1959) won't have to start taking RMDs until age 73. And they have to take their initial RMD by April 1 the year after they turn 73. 

Meanwhile, anyone born in 1960 or later won't have to take an initial RMD until age 75. And once again, that initial RMD doesn't have to be taken until April of the following year. That means younger savers get a few extra years to allow their IRAs to keep gaining value without having to remove a portion of their money. 

The penalties are also getting less steep

Right now, the penalty for failing to take an RMD is pretty harsh. But going forward, that penalty will be reduced to 25%. And in some cases, quickly making up a missed RMD might knock the penalty down to 10%.

Now, the reality is that it's best to avoid RMDs in the first place. Any penalty represents forfeited money, and that's really just a waste. But savers can take some comfort in knowing they won't be penalized to the same degree if they botch their RMDs.

Avoiding RMDs in the first place

For many people, RMDs are actually no big deal. That's because they end up needing their retirement savings to live on, so the amounts they're forced to withdraw are amounts they'd be removing independently of any requirement. 

But if you like the idea of avoiding RMDs completely, you can do so by housing your retirement savings in a Roth savings account. It used to be that only Roth IRAs let you off the hook for RMDs. But starting in 2024, Roth 401(k)s will no longer require RMDs, either. So now, you have multiple options if you'd rather keep your money invested and allow it to enjoy tax-advantaged treatment for as long as you'd like it to.