Retirees don’t have to take a required minimum distribution (RMD) from their IRAs this year.
RMDs were waived for 2020 as part of the CARES Act, the stimulus bill passed in March.
Is this a good thing? Will you need to take two RMDs next year? And what should you do if you’ve already withdrawn your RMD this year?
These are some of the common questions our advisors are hearing. Here are their answers:
1. Are RMDs suspended or postponed in 2020?
It is a suspension: you do not have to take two distributions next year for missing this year. Retirees still have flexibility to take withdrawals as needed, but they are not required to do so this year. The RMD waiver also applies to inherited accounts. However, non-spousal beneficiaries are not allowed a 60-day rollover return.
2. Is this a good thing?
Yes, assuming you don’t need your RMD to cover your living expenses. By not having to take an RMD, you’ll save on taxes since every dollar you pull out of a traditional or rollover IRA and other retirement plan is taxable as ordinary income. And you’ll have more in your retirement account to grow tax-deferred in future.
3. What should I do now?
Update your plans. If you set up an automated withdrawal to meet your RMD each year, you’ll want to stop it, unless you need the money for living expenses. We’re halting RMDs in many of the client accounts we manage.
If you’ve already ‘budgeted’ for the taxes you’ll have to pay for taking your RMD, you might consider this an opportunity to make a Roth conversion. This means taking assets from your regular IRA, which will be a taxable event, and transferring them to a Roth IRA. The advantage is that you will never have to take further distributions from the Roth in your lifetime, and if you do, you will never have to pay taxes on those withdrawals. Meanwhile, your assets can grow in the Roth without paying taxes on the gains. Talk with your tax advisor about whether this is a good time to convert.
4. What if I already withdrew some or all of my RMD for 2020? Can I return an RMD?
You can return the full distributions only if they were made within the last 60 days in what’s called a 60-day rollover. (A 60-day rollover can only be done once in 365 days.) If you made a distribution outside the 60-day window, however, you cannot return that amount.
We’ve been working with our clients to help them return RMDs they’ve taken in the last couple of months. If you’re managing your own accounts, you’ll need to do some paperwork to make the return official. Please contact your investment advisor or the financial institution that holds your retirement account (Charles Schwab, Fidelity, etc.).
You may have sold some of your equities to take your RMD in the last 60 days, which was unfortunate timing given the recent volatility. In our client accounts, we aim to sell from the most opportunistic spots within the portfolio. We’re now carefully looking at strategic times to buy back in as clients return their unwanted RMD back to their IRA accounts.
5. Can I still make a Qualified Charitable Distribution (QCD) this year?
You can still make a QCD of up to $100,000 from your IRA to a qualified charity in 2020, essentially giving to charity with pre-tax dollars. However, since RMDs are suspended for 2020, the distributions will not offset your RMDs this year. You may decide to wait until 2021 to do a QCD when it will offset RMDs and thus lower your taxable income. Talk to your advisor about what’s best for you.