RMD Tax Relief
Withdrawal waiver could mean a tax benefit for you.
As part of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) passed earlier this year, this act waives the required minimum distributions for Individual Retirement Accounts (IRAs) and 401(k) accounts for 2020.
Instead of removing funds, if you don’t need them, you can leave them in your retirement accounts to keep your investments growing as the market rebounds.
The waiver applied to many different retirement accounts, including: SEP IRAs, SIMPLE IRAs, 403(b) accounts, and 401(k) accounts. It also applies to your own IRA/401(k) accounts or any IRA accounts you inherited.
If you’re relying on the withdrawals for your living expenses, then this waiver may not affect you. However, if you’re able to take advantage of this waiver, you should consider the tax implications.
Will a withdrawal place you in a lower or higher tax bracket?
If you are working with an Inherited IRA account, while the waiver still stands for 2020, you’ll need to keep in mind another recent change to IRAs, this time from the Setting Every Community Up for Retirement Enhancement (SECURE) Act passed in late December of last year. That Act states any IRAs where the original account owner died on or after Jan. 1, 2020, the account must be depleted in a 10-year window, except for spouses. So, while you may choose to skip a withdrawal, it may affect that 10-year timeline, so you will have to be careful with the amount.
If you would like to forego your required minimum distribution this year, make sure any automatic distributions are put on hold.
If you’ve already taken a required minimum distribution this year before the CARES Act went into effect, you may be able to rollover that distribution back into your IRA, though it will have to be within 60 days of receipt.
You could also consider rolling the RMD amount (if you haven’t taken it yet) into a Roth as a conversion. Because the distribution has been waived this year, you can take pre-tax dollars from your retirement account, pay the requisite taxes on them, and convert them directly into a Roth. This can help you convert more dollars before you would enter a higher tax bracket.
If you’d like to consider how you can use the waived minimum distribution amount toward a charitable contribution, you could roll the funds to a charity via a charitable IRA rollover. Is this a QCD-Qualified Charitable Distribution? If you’ve already passed your 70 ½ birthday, you can donate up to $100,000 directly from your IRA to a charity. In normal years, this would count against your required minimum distribution, but it will not in 2020.
As the weeks tick by and we get closer to 2021, remember that you’ll have to choose the required minimum distribution next year, for inherited accounts as well as your own accounts if you’ve turned 72 in 2020. If you don’t, you could be hit with a 50 percent penalty tax (along with regular taxes) on what you should have withdrawn.
Required minimum distributions can be a complex topic, and we’re happy to discuss the ins and outs with you anytime! If you have questions or want to discuss your financial strategy, we’re available anytime by calling 717-393-9721, or emailing firstname.lastname@example.org. You can also contact your advisor directly!
Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this article serves as the receipt of, or as a substitute for, personalized investment advice from Domani. A copy of Domani’s current written disclosure brochure discussing our advisory services and fees continues to remain available upon request.