Required Minimum Distributions Waived for 2020 – What to Do Next

The CARES Act, or The Coronavirus Aid, Relief, and Economic Security Act, has waived RMDs for 2020, but beginning in 2021, they will return. A recently published Fidelty article offered up 2 key questions to think about if you have assets that are subject to RMDs. Here’s a brief synopsis. 

If you have an employer-sponsored retirement account or traditional IRA, chances are you’ve heard of RMDs. RMDs, or required minimum distributions, are the payments that the IRS typically mandates you begin taking once you’ve reached the age of 72. They can play an important role in your retirement plan, but because they are accompanied by stringent rules,  it’s important to have an RMD strategy. 

How and when should I withdraw my RMDs?

You basically have 2 choices. You can take a one-time distribution year after year or you can set up automatic withdrawals. Many opt for the latter and avoid the costly potential of forgetting. Distributions can be taken as a transfer to your bank, brokerage or cash management account, or in the form of a check sent directly to you. You also get to choose when you receive your funds: monthly, annually, or any other schedule you prefer. While the schedule doesn’t really matter, the deadline does. If you do not take an RMD, or you fail to take enough, the IRS penalty is 50% of the amount not taken on time. The deadline to take your first RMD is typically April 1 in the year after you turn 72 and December 31 each year thereafter. 

Tip: Most choose to have taxes withheld from their RMDs, but if you choose not to, be sure to set aside money for this very purpose. Also, sometimes underwithholding can result in a tax penalty. 

What should I do with my RMDs? 

There are several options on how to use our withdrawals, including spending them on living expenses, investments, wealth transfer, and charitable donations. 

“Making the best use of your RMDs can help avoid costly mistakes,” said Ken Hevert, senior vice president at Fidelity. “If you don’t plan to use that money for current living expenses, there are some key decisions to make — whether you want to reinvest it, gift it to your heirs now, or donate it to a charity.” 

Using the money for living expenses

Utilizing a budget in retirement is a great idea if you plan to use your RMDs to pay for current expenses. A budget can help you estimate living expenses, manage cash flow and determine how best to use your funds.

Using the money for new investments

If you don’t need your RMDs to cover expenses, consider investing them. While you can’t reinvest back into a tax-advantaged retirement account, you can invest in a taxable brokerage account. 

Tip: If you own investments in your retirement account that are difficult to sell, consider transferring them in-kind to a non-retirement account. This helps satisfy your RMD while allowing you to stay invested in the security.

Using the money for wealth transfer to an heir

There are several tax-smart options to pass along money to your loved ones using your RMDs.  They include:

  • Funding a 529 college savings account
  • Using the 5-year gift tax averaging strategy to contribute up to $75,000 every 5 years. 
  • Convert some of your traditional IRA assets to Roth IRA, which can be inherited without as many tax implications. For more information on this strategy, visit the original Fidelity article

Tip: There are other ways to transfer money to heirs, like trusts and gifting, so consult an estate planning advisor before making any decisions. 

Using the money for charitable donations 

Consider a qualified charitable distribution (QCD) when satisfying an RMD. A QCD is a direct transfer of money from your IRA custodian to a qualified charity. Once you’re 72 years old, your contribution counts toward your RMD for the year, up to an annual maximum of $100,000. It’s not included in your gross income and will not count against the limits on deductions for charitable contributions, both of which can be significant advantages for some high-income earners. 

Regardless of which scenario best suits your unique needs, building a retirement income plan that best uses your RMDs can help you reach your financial goals. Contact AnnuityFYI with any questions or comments at support@annuityfyi.com or call us at 1-866-223-2121.

Written by Rachel Summit

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