The 2020 RMD Rundown
Please read until the end for the March 2020 update.
Retirement savings are necessary nowadays. Many experts recommend at least 1 million saved before retiring, and Americans have been listening! Many contribute to a 401(k), 403(b), or IRA to build a sustainable retirement, but there is one thing that most do not consider when planning for retirement: RMDs. The required minimum distribution is a specifically calculated amount by your custodian (the company that holds your account) and must be taken yearly, beginning at age 72. If you skip a distribution, you’ll be subject to a 50% penalty fee on the amount you were supposed to take plus appropriate taxes.
The contributions and growth are tax-deferred, meaning you will eventually pay taxes when you withdraw. The law was implemented by Reagan in the 1980s as a way to ensure the account owners pay the taxes as it was possible to avoid taxes by not withdrawing in their lifetime. Though it may seem like a means to squeeze extra tax out of you, there are strategies to use RMDs to your advantage. A financial professional can help create a plan.
How to Take RMDs
You’ll need to take your RMD by December 31st of the year it’s due. However, your first RMD can be deferred until April 1st of the next year. Take this information with a grain of salt as you could end up paying double taxes in one year if you decide to defer.
Before you turn 72, consider calculating your RMD. Though we recommend waiting for the custodian to send your official RMD amount, you can estimate by dividing your end of year account balance(s) by your distribution period from the Uniform Lifetime Table. For example, if your end of year account value is $500,000 and you are 76 years old, your RMD should be about $22,727.27. You may use the distribution on anything, though you may want to devise a plan for smart spending.
As you age, your RMD distributions will encompass a larger portion of your taxable retirement accounts. The Life Expectancy Factor of the Uniform Lifetime Table decreases as you age. Because of this, as you progress through retirement, your total retirement account is divided by an ever-smaller number, which increases the amount of money you are Required to withdraw. Your beneficiaries will also have to withdraw from an inherited IRA (whatever is left after your passing) but with a different criterion due to the changes in the S.E.C.U.R.E. Act.
RMDs may seem like an inescapable headache, but there are solutions. While you cannot legally avoid taking RMDs altogether, there are ways to minimize the amount. At RGA, we specialize in legally reducing RMDs, so you don’t have to watch your retirement savings drain. We believe retirement should be stress-free and about doing all the things you’ve wanted to. Don’t let the hassle of RMDs hinder your big plans! If you want to avoid unnecessary taxes and distributions, click the link below, call 1-800-467-8152 or email firstname.lastname@example.org.
March 2020 Update
On March 27th, 2020, the CARES Act was signed into law in response to COVID-19’s economic implications. The 2 trillion-dollar relief bill not only benefits low- and middle-class Americans, it also gives retirees a break. All RMDs have been suspended for 2020, meaning if you haven’t already taken your RMD, you don’t have to. The act suspends all RMDs for the year, regardless of COVID-19’s impact. You also don’t have to show proof of financial hardship to suspend your RMDs. Though many custodians may assume you won’t be taking your 2020 RMD, give them a call to ensure you’re on the same page.
Though there’s no retroactive RMD clause in the bill, early birds may be able to reverse the RMD by rolling over the distribution to an IRA. This only applies to RMDs taken within the last 60 days and excludes non-spousal inherited IRAs. The IRS only allows one 60-day rollover per 12 months, so consider discussing this with your financial advisor before taking action.
If it’s been longer than 60-day since you’ve taken your RMD you won’t be able to do anything, as of now. Looking back at the RMD suspension of 2009, the IRS might grant a blanket extension. Stay tuned for additional updates.
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