After the CARES Act waived RMDs for 2020, 2021 ushers in a new year of hope and a renewal of Required Minimum Distributions from retirement accounts.
Required Minimum Distributions: the Basics
For those taking their RMDs, this is old hat. For new RMD takers, in general, the IRS requires that you take a Required Distribution from your traditional and inherited retirement accounts. There are a few exceptions that come to mind, such as your non-inherited Roth IRA or some qualified retirement plans if you are still employed and not a 5% owner. There of course are other contingencies you can research on the IRS website
RMDs commence in the year you turn age 72. Remember, this is a change from age 70 1/2, instituted by the SECURE Act on January 1st, 2020.
So once you have identified which accounts needs RMDs and whether you must take one, the next question is how much to take?
We determine and calculate RMD requirements for all of clients (to confirm with their tax consultant, of course) To determine an account's RMD yourself, you will take the Uniform Lifetime Table from the IRS website, take the life expectancy factor that corresponds with your age and divide your December 31st balance by this life expectancy factor.
So for example, an $100,000.00 RMD balance divided by an age 72 life expectancy factor of 25.6 is a $3,906,25 required minimum distribution.
The penalty for missing an RMD is severe- 50% of the amount not taken that you were due to take. So, don't forget to check with your advisors to ensure your RMD plan for 2021 is in good order.
As far as RMD strategies go, each client is different. Here are 5 different options our clients have used when taking their RMDs:
- The Early RMD: taking your RMD early is a strategy that we like to use for clients who are worried about market volatility in their portfolios. Imagine last year, 2020, taking an RMD in February and then the market declining significantly. If the market declines in the year, your RMD does not change- it is based off of the December 31st end balance of the year before. A retiree could be taking from a PERCENTAGE standpoint a very large amount if the account significantly declines before you take the distribution.
- The Social Security Supplement RMD: many clients like RMDs to come with their social security. Clients like this method because it is easier to budget throughout the year by receiving a constant amount, every month, on the same day. You also will have a "dollar cost average withdrawal" effect by taking from your portfolio at some relative high times in the market and some relative low times in the market.
- The Last Second RMD:the last second RMD, while it seems to carry a negative connotation, works well for many people. For clients who want to maximize the tax deferral of their investments throughout the year, this is a viable strategy. Some small business owners who work may want to see what type of year that they have and determine how to use their RMD at years end (make a retirement plan or profit sharing contribution, pay down a line of credit, send in a large January 15th estimated tax payment to IRS, etc) may find this strategy attractive as well.
- The Generous RMD:Some clients have charitable goals and elect to use a Qualified Charitable Distribution. This "QCD" allows the client to donate their RMD tax free directly to a qualified charity of their choice. Some clients who have IRAs and do not need their income, even if not charitably inclined, may donate to a charity to avoid in increase in tax rate or medicare premiums.
- The RMD Deferral: This works very well for a client who has an RMD requirement, is retiring that year and will have lower income in their next year. The client can defer their first years RMD (age 72 year only!) and take it by April 1st of the next year (age 73 year) AND take their age 73 RMD by December 31st of that year (age 73 year). Of course, this strategy involves some coordinating with an advisor, but is one to consider that could help save on taxes.
As always, feel welcome to reach out to us at any time with any questions on coordinating your RMD.