The CARES Act offers a one-time opportunity to those age 70 ½ and older to forego their Required Minimum Distribution (RMD) for 2020. Susan Freed, CFP®, Managing Director at Chevy Chase Trust, answers questions about the important considerations involved in making this decision. As with all financial decisions, please consult your tax advisor.
Should I forgo taking my RMD this year?
This is not a one-size-fits-all answer and depends on the facts and circumstances of your personal situation. If your retirement plan has taken a hit due to market volatility, the ability to skip the RMD distribution this year warrants consideration. The most important question is whether you need the distribution to fund your lifestyle. If the answer is yes, you should consider whether you have other income or assets that you can spend instead of the RMD. If you do, you may want to skip taking an RMD this year and give your retirement plan time to grow tax-free.
What are the tax implications of skipping a year?
If you decide to skip a year your tax bill will likely go down. But remember, if you liquidate other appreciated assets to replace your lost RMD income, there will be capital gains taxes to pay. If you are able to take money out of your IRA at a low tax bracket it may be advisable to take your RMD this year, especially if a large portion of your net worth consists of pre-tax retirement assets.
For those who typically have taxes withheld on RMDs, consult with your tax advisor about the impact of skipping a year on your quarterly estimated or other tax payments.
Can I withdraw monies for a Roth IRA?
For those who do not need their RMD for living expenses, consider withdrawing monies to contribute to a Roth IRA. If you contribute your RMD dollars to a Roth IRA in 2020, your tax situation is neutral; you will pay tax on the RMD just as you would in any other year. Yet monies have been transferred to an account that grows tax-free and neither you, your spouse nor other beneficiaries are subject to taxation on distributions. This can be an effective inter-generational estate planning opportunity.
Is a partial distribution an option?
Yes, a partial distribution is an option, especially if you can take monies out of your IRA at a relatively low income tax bracket or only need a portion to fund living expenses. For those who are charitably inclined, consider taking Qualified Charitable Distributions as a way to allocate monies from your IRA to your favorite philanthropic causes.
If I decide to suspend, what do I have to do?
For those who elect to suspend RMDs for 2020, you must notify your IRA plan custodian in writing. If you have already submitted paperwork to receive your 2020 RMD, or have set up an annual automatic distribution, you should provide written notice that you wish to suspend for 2020.
What if I have already received my RMD for 2020?
If you’ve already received all or a portion of your RMD, you may ‘roll over’ one payment back into your IRA. This applies to payments received after January 31, 2020 and the roll over must be completed by July 15, 2020. Your plan custodian can assist you as appropriate.