November 2020 Question of the Month

By Admin Prepare

November 19, 2020

“My wife and I are 75 years old, so we are at the age of having to take required minimum distributions from our retirement accounts.  We generally just add this money to our savings account as we don’t usually need it for income.  This year with the elimination of RMDs, our current advisor told us not to take it as it will save us tax dollars.  Is that the right thing to do?  Thank you.”  John

Hello John.  The year 2020 has been a very crazy and unique year, and because of all that has happened, there have been some one year retirement rule and law changes.  The changes have created some options and opportunities, forcing people to make some decisions.  One of those decisions is whether to take your required minimum distribution (RMD) or not.

Now I am not going to be able to tell you specifically what to do because I don’t know your specific situation and have enough information.  But, I can provide you with some key factors that everyone must consider in order to make the proper decision here.  Let’s start with the factors that would suggest that you forgo taking your required minimum distribution this year.

If your taxable income is higher this year than it normally is or than it will be in the near future (maybe you are still working), then you very well could save tax dollars by not taking your RMD this year.  Also, if your normal RMD causes more of your Social Security to be taxed, some other dividend or capital gains to be taxed, or your Medicare premiums to be higher, then you probably should not take your RMD this year. 

However, there are many situations where you probably should go ahead and take your RMD this year.  First, if you are in a low tax bracket currently, and your normal RMD does not put you in a higher tax bracket, then you may want to go ahead and take your RMD.  For example, if your retirement income, including RMDs has you in the 12% tax bracket, then you probably would never be able to pay tax at a lower rate then that, so it very well may make sense for you to go ahead and take it. 

Next, if you believe tax rates will be higher in the future, then you may want to go ahead and take your RMD this year.  Based on historical tax brackets and rates, todays tax system is at very low levels.  But this tax system is set to expire at the end of 2025 and revert to higher rates.  Many people feel this will happen before then.  So, if you believe tax rates will increase in the future, you very well may not want to waste a year to pay at these current low rates.  By deferring your RMD, you could be causing yourself to pay more taxes than required.

Also, if you donate any money to charity, you definitely want to do this through your IRA by doing a qualified charitable distribution (QCD).  This gives you a way of getting money out of a taxable account without having to pay taxes on it. 

Finally, if you are wanting to get more tax efficient by moving money out of taxable accounts into tax free accounts, then this year presents a one time very unique opportunity of being able to do a Roth conversion on your RMD dollars.   Normally, if do not need your RMD, you cannot convert that amount to a Roth IRA. But this year you can since the RMD requirement has been waived.

So, consider the above factors before making the decision of how to handle your RMD for this year.  Again, this is a very unique year, and you want to take advantage of that by making the most proper decision for your own specific situation.

Content is for educational and informational purposes only.  It is not intended to be used as the sole basis for financial decisions, nor should it be construed as advice designed to meet the particular needs of an individual’s situation. You should contact your retirement and tax professional before utilizing any of the information in this article