RMD Requirements for 2021 are back
In March of 2020, the Coronavirus Aid, Relief, and Economic Security Act (also known as the CARES Act) waived the RMD requirements for 2020 for most taxpayers. This waiver was given to allow savers to leave the funds in their IRAs to grow and potentially recover losses incurred because of the market downturn. As of January, the waiver has ended for the year 2021 which means RMD requirements are back.
The ABCs of RMDs
Let us review a few of the basics of Required Minimum Distributions or RMDs:
- Required – The tax code requires you to begin withdrawing from your qualified funds (IRA, 401(k), 403(b), SEP and TSP) starting at the age of 72 so they can be taxed.
- Minimum – The minimum yearly amount is calculated based on the year-end balance of the account(s) and government life expectancy tables available in IRS PUB No. 590.
- Distribution – The income must be distributed (or paid out) to the owner, beneficiary, or a qualifying charity.
Change of the RMD start date from age 70 ½ to 72
In December of 2019, The Secure Act changed the RMD start date from age 70 ½ to 72. If you reached the age of 70 ½ in 2019 the prior rules apply. If you reach 70 ½ in 2020 or later, you must take your first RMD by April 1 of the year after you reach the age of 72. You are given extra time only on your first RMD. The subsequent year’s distribution must be taken by December 31st.
Taxes – Taxes – oh yes, don’t forget the Taxes
As you are approaching age 72 you may be wondering about the tax impact of taking your RMD.
Here is a summary:
- When you take your RMD from your IRA you will receive a 1099R. This will be entered on your 1040 and you will pay ordinary income tax on the income in the year of the distribution.
- Your RMD will add to your (Adjusted Gross Income) AGI. So, it is possible your RMD could push you into a higher tax bracket.
- If your RMD pushes your AGI above $88,000 single or $176,000 joint, you will have to pay higher Medicare premiums.
- Unfortunately, you cannot skip your RMD because there is a 50% penalty tax if you do not take it.
Legal RMD Tax Avoidance for the Charitably Minded
One way to avoid the taxation of RMDs is to use your distribution for charitable giving. You can make direct qualified charitable contributions of up to $100,000 each year. The gift must be made directly from your IRA to the charity.
The two inevitable things in life are said to be Death and Taxes. At least with death you only need to go through it once. We suggest as you are approaching 72 to review your taxes with your CPA and advisor to see if you have options that can make your taxes less taxing.
Do you have questions?
Medallion Financial Group is here to assist you with any changes or questions regarding your RMD planning. Please give us a call! 301-990-9704
When you work with any of the advisors at Medallion Financial Group, you will get help charting a course through the complex world of wealth management and tax planning. We work together to build a dedicated, long-term, and disciplined approach that is tailored to your unique needs and objectives. Are you ready to start a conversation?
This information is not intended to be tax advice. Please consult your personal tax consultant to determine the best course of action for your situation.
About the Authors
John and Laura Stohlman have been working with clients to help them achieve retirement success since 1987. Both John and Laura have the following designations: Certified Financial Planner (CFP®) and Chartered Federal Employee Benefits Consultant (ChFEBC®).
At Medallion Financial Group, we believe financial planning is about Family. We have been helping families invest in the future since 1987 through a holistic planning approach. We recognize there are a variety of needs when it comes to retirement planning, plan rollovers, annuities, college planning, life insurance options, and investment management. It is easy to get lost in a sea of choices. Our financial advisors help with the basics and beyond to enable our clients to get the education, advice and management they need to retire with confidence.
Our focus is twofold: first and foremost, we are fiduciary advisors. We stand against any violation of laws, values, and ethics. Second, we treat our clients as part of our family, not only those who call Maryland and Georgia home, but clients across the US who have benefited from our reputation of personal service, integrity, and expertise.
We strive to exceed client’s expectations – because we have high expectations of ourselves.