To RMD or not to RMD, that is the question.
Well folks, just when we thought we had seen all the changes to the required minimum distribution (RMD) with the ratification of the S.E.C.U.R.E. Act, more changes are in effect. In December 2019, the S.E.C.U.R.E. Act became law changing the initial RMD age to 72 starting on January 1, 2020. Those who turned 70 ½ prior to December 31, 2019 must follow the previous RMD laws. The act also allows taxpayers to continue contributing to a traditional IRA past age 70½ as long as they are still working.
Now an unexpected crisis arises, a pandemic as a matter of fact. With the far-reaching financial impact of the pandemic, the government has stepped in to provide temporary relief by passing the C.A.R.E.S. Act for taxpayers. With the Coronavirus Aid, Relief, and Economic Stimulus (CARES) Act, the government has provided a temporary waiver and have suspended RMDs for 2020. Other such provisions include if an RMD has been taken in 2020, taxpayers may be able to rollover the distribution to an IRA, even the same IRA the distribution was taken from. Though RMDs are suspended for 2020, the Qualified Charitable Distribution (QCD) rules remain fully in effect. You still can make a QCD in 2020. While the QCD won’t count toward an RMD in 2020, it still has benefits. You’re reducing the value of the IRA account, and that will reduce future RMDs.
With the RMDs suspended there leaves the dilemma, ‘To RMD or Not to RMD’?
In one scenario, though not required, taking the RMD in 2020 will reduce the account balance and required future distributions, potentially reducing your future overall tax liability. Of course, under this plan of action you could also request a combination of distribution, Roth Conversion, and QCD, lowering your taxable IRA distributions now and reduce the account balance for future distributions, potentially reducing your future RMD tax liability. Using a Roth conversion in this scenario can reduce your account balance while moving the money into a tax-free account.
In another scenario, not taking the RMD in 2020 will allow the account time to recover and grow for the remainder of the year making investment sense, due to the dramatic financial impact of the pandemic. But in this scenario, future distributions may be higher due to the anticipation of recovery and growth and may increase your future overall tax liability. But with proper planning, the tax liability is contemplated.
Another option is to do nothing and let another opportunity pass by. To make the most informed decision we recommend performing a projection where we consider your income, age, and tax before making any transactions. For further assistance with investment and tax projections regarding the CARES Act and RMD suspension, consult with your tax and investment professionals.