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Your Clients can Delay RMDs, Should They?

The ins and outs of delaying required minimum distributions for 2020.

A provision of the CARES Act allows for the waiver of required minimum distributions (RMDs) for 2020. Just because your clients can delay their RMDs, should they?

This includes RMDs for account holders of IRAs, 401(k)s, 403(b)s and other retirement plans. The waiver includes those who reached age 70½ in 2019 and who were required to take their first RMD by April 1 of this year. This also extends to those who are the beneficiaries of inherited IRAs who would normally be subject to taking their RMD in 2020.

Note that any RMDs tied to a defined benefit pension plan are not included in this waiver and must be taken for 2020.

Clients whose retirement accounts have likely been impacted by the market declines arising from the COVID-19 pandemic can skip their RMD for 2020, and there are no forms or any sort of requirements to meet. This means that they can leave the funds in their retirement account and forgo paying taxes on the distribution. The money can stay in their account and continue to grow tax-deferred.

Should your client delay their RMD in 2020?

In general, the answer is that it probably does make sense for them to skip their RMD this year. They save on the taxes due and the money can stay in their account and grow when the market recovers. In addition, the SECURE Act changed the rules on contributions to an IRA removing the age limits. For clients who still have earned income and whose income falls within the normal limits, they can contribute to an IRA regardless of their age allowing them to further increase their savings for retirement.

Clients can still take distributions from their retirement accounts in an amount higher or lower than their RMD amount, as in past years. They are responsible for any taxes on the amount withdrawn.

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Why they might want to take their RMD:

Even with the waiver, there might be reasons for clients to consider taking their RMD, whether all or in part.

Qualified charitable distributions (QCDs) are still available from IRA accounts. A QCD involves a donation of some or all of a client’s RMD to a qualified charitable organization, up to a limit of $100,000 annually. The amount donated to the charity is exempt from federal taxes.

Even though the age to commence RMDs after Jan. 1, 2020 was increased to 72 by the SECURE Act, the age to start QCDs was left at 70½. For those clients who are charitably inclined and eligible by age, this can still be a good strategy for their charitable giving. This is especially true for those clients who cannot itemize their charitable contributions. Additionally, the amount withdrawn for the donation will reduce their RMD from what it otherwise would have been for 2021.

Managing their tax situation both for the current year and for subsequent years might be a reason for your client to continue to take distributions from their retirement account, even if they aren’t required.

Tax rates in general are low compared to the years prior to the tax reform legislation that went to effect for the 2018 tax year. For clients whose situation puts them in a low bracket, taking some or all of their normal RMD amount might make sense. For example, they might take enough to “fill up” their current tax bracket. All else being equal, this will serve to reduce next year’s RMD.

Consider a Roth conversion instead. Though technically not an RMD, your clients might consider taking the amount of their RMD (or perhaps a higher amount) and doing a Roth conversion with the money. If, for example, your client’s RMD would have been $50,000 they can now take that amount from their traditional IRA account and convert it to a Roth IRA. Their tax liability will be the same as if they had taken an RMD, this money is now in a Roth IRA, it’s not subject to RMDs in the future and the money can be withdrawn tax-free in retirement if the five-year rule and other requirements are met.

The RMD waiver for 2020 presents another planning option for you to discuss with your clients. Given that account values are generally lower than the values at the end of 2019 upon which the RMDs are based, the waiver will represent a good option for many of your clients.