RMDs Not Required in 2020 = Good News for Seniors

The Coronavirus Aid, Relief & Stimulus Act waives required minimum distributions (“RMDs”) from IRAs in 2020. It’s a one-time waiver that could substantially lower taxable income for those seniors fortunate enough to not need any/all of their RMD to support their annual income needs.

Let me explain.

The money you contributed to your Traditional IRA or Rollover IRA – created when you rolled funds from a 401(k) or other retirement plan from an old employer into an IRA – had not yet been taxed. In the years since, it’s grown tax-free. The IRS is going to require that you take a certain percentage out, every year after you turn 72[1], and pay income tax on that distribution. Simply put, after all of these years of tax-free growth, the IRS wants to collect its pound of flesh (aka tax). In the year you turn 72 this distribution must total 3.91% of the value of your IRA on December 31st of the year prior. From 73 on, the percent that you are required to take rises – to 4.37% at 75, 5.35% at 80, 6.76% at 85 and so on. These distributions are called RMDs. And if you fail to take them on time the penalty is severe – the IRS demands you pay them 50% of the RMD amount you should have taken. Ouch.

Some seniors are fortunate enough to be able to live off of their Social Security and other sources of income in retirement – for example, pensions, private annuities, and taxable savings. Some others need only take a distribution from their IRAs that is smaller than their RMD. For these fortunate seniors, a one-year holiday from RMDs means that their taxable income in 2020 could be substantially lower.

This opens up lots of opportunities, tax-wise and portfolio-diversification-wise. For those who have taxable brokerage accounts with substantial long-term capital gains but in dire need of change – like dumping legacy stock, mutual fund or bond holdings in favor of a shift to a lower-cost, better-diversified mix of Exchange Traded Funds (ETFs) – the waiver of RMDs coupled with the fall of stock market values represent a unique opportunity in 2020 to reconfigure smarter portfolios for the future.

Now is a good time to reach out to a Certified Financial Planner. Take advantage of the fact that s/he is a fiduciary who must put your interests first. You may discover that your current Financial Advisor isn’t actually earning the fees you’ve been paying.

[1] The SECURE Act, signed in December 2019, raised the starting age for RMDs from 701/2 to 72 for those who had not yet turned 701/2 by December 31, 2019.

Eileen McPeake

Author Eileen McPeake

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