The Coronavirus Aid, Relief & Stimulus (CAREs) 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, 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 are 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.
And if you’ve already taken your 2020 RMD you can still benefit. You have 60 days to redeposit the funds to your IRA.
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.