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Required Minimum Distributions Amid COVID-19
August 31st deadline approaching for retirement account holders

There’s no doubt 2020 has been a difficult year, but it also ushered in financial benefits for senior citizens.

Required minimum distributions (RMDs) are being waived for certain retirement accounts this year, giving seniors the flexibility to make portfolio changes they otherwise couldn’t have. The Coronavirus Aid, Relief and Economic Securities Act, known as the CARES Act, allows taxpayers to skip their annual RMD from a defined-contribution retirement plan, such as a 401(k), 403(b) or IRA.

We know there are a lot of questions surrounding this new law, and we’re here to help you navigate those. In honor of National Senior Citizens Day today, we want to address a few common questions you may have.

Who qualifies for the RMD waiver? Anyone who turned age 70 ½ in 2019 and would have had to take their first RMD by April 1, 2020. It does not apply to direct benefit plans.

What’s the benefit of waiving my RMD for this year? It would lower your taxable income for 2020, and possibly allow you to avoid selling investments that have lost value because of the economic downturn.

That sounds good. Why wouldn’t I do it? You’ll need to first consider the long-term effects of your decision. If you don’t reduce your retirement account balance this year, it might increase the amount of your future RMDs. The required amount is based on your previous year’s balance and your life expectancy.

You’ll want to avoid having the higher balance bump you into a new tax bracket or trigger increased Medicare premiums moving forward. If that is the case, it might be beneficial to take some – but not all – of your distribution this year.

I count on my RMD for living expenses. Can I still take it? Absolutely. No one is required to waive their RMD.

I’ve already taken my RMD for 2020. Did I miss out? Through August 31, you can rollover that amount into an IRA. This may offer the unique opportunity for you to roll that distribution into a Roth IRA. That would allow you to pay taxes on the conversion now, but your later Roth distributions would be tax-free. That makes sense if you are in a lower tax bracket this year than you or your beneficiaries might be in the future.

Will I just have to take out extra in 2021? No, you will resume with your regular withdrawal in 2021. However, if you had not turned 70 ½ by the end of 2019, you won’t need to take your first RMD until April 1 of the year after you turn 72.

Should this change my charitable giving for the year? It could. If you’re looking to reduce your account balance so that your future RMDs are lower, charitable giving is a good option, both for you and the charitable organizations receiving support. You can distribute up to $100,000 directly from your traditional IRA to a charity.

However, that donation would not count as an itemized deduction, so your taxable income would remain the same as if you had opted not to take a distribution at all. Unless you want a way to lower your retirement account balance, it makes more sense to donate from a taxable account instead.

If you have additional questions, or want to get started on your distribution plan, contact our Investment Services Team today. We can’t wait to help you choose the path that’s right for you!

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