When the CARES Act was passed in March of this year, one of the provisions eliminated the Required Minimum Distribution (RMD) for the year 2020 from qualified accounts (such as a 401k or IRA). Some people rely on their RMD as essential income to pay for their living expenses. If you have the option, consider withdrawing funds from any taxable or Roth IRA account first before pulling from your qualified accounts. If you do not need your RMD for income, then you may benefit more from not taking the distribution from your qualified account this year and saving yourself the taxes.
So how do you decide?
It all comes down to whether it makes sense for you to pay taxes now or pay taxes later. Ultimately, whenever you withdraw funds from a qualified account you will have to pay taxes on the distribution.
a. Are you in a similar tax bracket for 2020 and 2021? If you answered yes to this question, it may make sense to take advantage of this waiver and forgo your RMD in 2020 to save yourself a year of paying taxes (which may be especially helpful to some during the economic uncertainty we have been experiencing). An added benefit to this scenario is that this allows those funds that would have been withdrawn to continue growing tax-deferred in the account. On the flip side, keeping the funds in the account may cause a larger value to calculate your 2021 RMDs from (and thus, a potential increase in your tax liability). In addition, there are benefits to having reduced income for a year. For example, Vermonters whose household income falls under a certain limit ($138,250 in 2019) may qualify for a Property Tax Credit Claim on their homestead.
b. Is your tax bracket substantially lower this year than it will be in 2021? If, instead, you answered yes to this question, it may make sense to continue your RMD as normal in 2020. In this scenario, withdrawing those funds will further draw down your retirement account value and allow for a smaller RMD in the following year when your tax bracket is higher.
Common FAQ’s on the RMD rule in the CARES Act:
1. What if I took my RMD for 2020 before the CARES Act eliminated this requirement?
**NEW THIS WEEK! If you already took your RMD in 2020 and do not need the funds, you can return the funds by August 31, 2020.
2. Do Inherited IRAs fall under the waiver rule?
Yes, if you have an inherited IRA you are not required to pull an RMD for the year 2020. If you have already taken your distribution you can return it by August 31, 2020.
3. Can I still complete a Qualified Charitable Distribution (QCD)?
Yes! A QCD is a direct transfer of assets from your qualified account to a qualified charity. Distributions (up to specific limits) to a charity can fulfill the RMD requirement and are not taxable to you. This may be another opportunity for you to reduce your account value for future and higher tax bracket years (if applicable).
Please contact us if you have questions about your RMD or the strategies listed above. We can help determine the best scenario for you!