June 16, 2020
What is an RMD?
Under current law, holders of 401(k) accounts and traditional individual retirement accounts (IRAs) are required to withdraw a percentage of their account balances each year once they reach age 72.
Formerly the age was 70 ½ and that rule still applies if you attained age 70 ½ before January 1, 2020. (SECURE ACT article)
This annual withdrawal is called a Required Minimum Distribution.
The RMD requirement assures that the money in tax-favored saving accounts is used to provide income during retirement.
The RMD is calculated so as to spread balances over the participants’ remaining lives. The penalty for failure to take an RMD is 50% of the amount that should have been withdrawn.
New Rules for 2020 RMDs
The government waived required minimum distributions from retirement accounts this year as part of the CARES Act $2 trillion coronavirus stimulus package.
This is Good News because retirees are able to keep the money in these accounts so that their portfolios can potentially rebound from recent market volatility. This will benefit investors who have these accounts but don’t need to draw down their assets right away.
For those who already processed their 2020 RMD
For retirees who already took their RMD this year, they have the option to return that money by redepositing the distribution. However, the redeposit must be done within 60 days of the withdrawal. Putting the money back into the account is relatively simple.
Will two RMDs be required next year?
No. The waived RMD is a suspension, not a postponement. RMDs for inherited accounts are also waived.
Qualified Charitable Distributions
What is a QCD?
A qualified charitable distribution is a withdrawal from an individual retirement arrangement (IRA) that’s made directly to an eligible charity. IRA account holders who were at least age 70½ as of Dec. 31, 2019, or who reach age 72 after this date, can contribute some or all of their IRAs to charity.
QCDs can be used to help keep your adjusted gross income (AGI) and taxable income within a desired range, because income from a charitable distribution “bypasses” your Form 1040.
This can help you manage your income thresholds. The maximum annual amount that can qualify for a QCD is $100,000 per individual.
Roth Conversion Opportunity
Now might be a good time to consider converting your traditional IRA or 401(k) to a Roth IRA.
Although, you will pay taxes on the money you convert, we are currently in a historically low tax environment.
Another benefit is that Roth accounts grow tax free and there are no required minimum distributions in retirement.
Every situation is unique and the rules governing retirement accounts can be complex. For more detailed information, please reach out for a consultation.