Video: Stay on Top of Required Minimum Distribution Rule Changes for 2020 December 4, 2020
Stay on Top of Required Minimum Distribution Rule Changes for 2020
Welcome, this is Blaine Carr and I am a Senior Wealth Advisor with Petersen Hastings. We are an independent wealth management firm located in southeastern Washington. We are passionate about Fiduciary-Centered Advice and education to our clients, prospective clients, and our community. This is my first web video and I plan on making more of these in the future. Today I will cover the 2020 rules for Required Minimum Distributions.
As you might be aware, account owners are generally required to start drawing money out of IRAs and retirement plans each year upon reaching age 72. This used to be age 70 ½ prior to passage of the SECURE Act in late 2019. This Required Minimum Distribution rule, or RMD, establishes a minimum amount that has to be drawn out by the end of each calendar year. There is a plethora of rules related to Required Minimum Distributions, but today I will focus on something specific to 2020.
2020 has turned out to be anything but a normal year, and as is the case with RMDs. After the stock markets crashed earlier this year, Congress passed the CARES Act, which, among other things, provides a holiday from RMDs for 2020. This is similar to the waiver provided back in 2009, and applies to IRAs, Beneficiary IRAs, and most employer sponsored plans. This is intended to provide relief to investors, so they don’t have to sell at low market values when taking an RMD. You might not depend on all of this distribution for your living expenses, so the CARES Act provides additional tax planning opportunities for investors in 2020. At this point I do not expect this waiver to be effective for 2021.
So, what should you do if you haven’t taken your RMD yet? I’ll give you one of my favorite answers, IT DEPENDS. First, do you need the money and your IRA is your only source to draw from? If so, you don’t have much choice, unless you can afford to only take a portion of the distribution. Second, do you have a need for funds next year, above and beyond your RMD, and can only pull that from an IRA? It might benefit you to take some out of your IRA this year, so you don’t have to pull as much out next year.
After that it gets even more complicated. You might save a lot more tax than you realize if you skip your RMD this year. For taxpayers in the 12% or lower bracket, taking the RMD might cause some your Dividends or Capital Gains to become taxable. In addition, taking funds out of an IRA could result in a greater portion of Social Security benefits to be taxed. If you have higher income, you might want to avoid taking the amount of the distribution that causes your Modified Adjusted Gross Income to exceed the next IRMAA bracket. Why does that matter? If you go over the first limit your Medicare premiums would increase about $70 per month for 2022 and the premiums further increase as you move into the higher brackets. I plan to cover this concept further in a future video, but you can access more information on this at Medicare.gov.
If those situations don’t apply to you, or the impact is minor, you should strongly consider taking your RMD this year, and reinvesting it in and after-tax account or padding your savings account. Another option is to convert an equivalent amount of the distribution to a Roth IRA. A Roth conversion is taxable, but not only do the funds stay invested, future growth in the Roth is tax-free if the funds are held for 5 years after the Roth conversion.
Finally, you might be using RMDs to fund charitable contributions. One of the best ways to do that is through a Qualified Charitable Distribution, or QCD. Utilizing a QCD does not provide a tax deduction, but the distribution is not taxable if certain rules are followed, including instructing the IRA custodian to send the check directly to the qualified charitable organization. You might be fine to continue using QCDs in 2020, but if you are not planning to give away all of your 2021 RMD, you might want to save some of this for 2021 so that next year’s RMD receives tax-free treatment.
Okay, let’s sum this up. You might have an opportunity to save taxes if you take a pass on your Required Minimum Distribution for 2020. Some of you might benefit from taking your distribution this year or making a Roth conversion. And finally, those making Qualified Charitable Distributions might want to push those out to 2021 to reduce the tax impact on next year’s RMDs.
As always, do check with your experienced tax and investment advisor prior to taking action. I hope you enjoyed this video. If you did, I appeal to you to hit that like button and also share this with your family and friends. I’ll report back soon with my take on tax legislation from the Biden Administration. Have a wonderful day.