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Income, tax holiday for older retirees

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Older retirees required to take distributions from IRAs can get a tax break in 2020, and it’s worth discussing with their investment advisor.

“If you’re in a situation, especially as a retiree, where you aren’t forced to use that money for living expenses, it’s a great opportunity,” Dave Sandstrom said on a recent Money Talk Podcast.

As part of the $2.2 trillion initiative to stimulate the economy during the COVID-19 pandemic, Congress has suspended required minimum distributions (RMDs) for calendar year 2020. That means retirees in their 70s who were supposed to withdraw money from tax-advantaged retirement accounts such as IRAs can skip a year, thus avoiding the income tax they’d have to pay on such withdrawals.

Typically, individuals who do not take their RMD face severe penalties on top of the taxes they would owe. The RMD holiday also applies to beneficiaries of inherited IRAs.

Forgoing the RMD for 2020 would allow the withdrawal amount to remain invested tax-deferred in the IRA. For some retirees, avoiding the extra income from the RMD this year could lead to other advantages, Dave explained.

“Especially if you’re in a position where you’re living primarily off your Social Security and you might have large IRAs in place,” Dave said, “you could even get an added benefit of avoiding additional taxation on Social Security benefits by taking a year off of the required distribution.”

Individual situations vary, so investors should consult their investment advisor and a qualified tax professional to determine what works best for them.

The RMD holiday is for 2020 only, so IRA holders would still be responsible for taking subsequent annual distributions. And because the size of RMDs is determined by the amount in the account (and the age of the account holder), those who forgo RMDs this year might face higher mandatory withdrawals in 2021. They might leave larger IRAs for their beneficiaries to inherit.

Suspending their RMD in 2020 doesn’t appeal to everyone.

“Cash flow is king,” Patrick Weyer said. “For clients who only have pretax accounts or small after-tax accounts and are counting on their RMD to help cover living expenses, they should take their RMD knowing that it has been taken into consideration as a part of their investment plan coming into 2020.”

Dave and Kyle Tetting encouraged investors who are using IRAs to fund qualified charitable donations (QCDs) to continue directing their RMDs tax-free to nonprofit organizations.

“The great thing about that is that it lowers your IRA balance for next year potentially as well,” Kyle said on the podcast, “so it lowers your required distribution from where it otherwise would be. And of course, it benefits a charity at a time when they desperately are needing it.”

Written by Joel Dresang. Contributing: Patrick Weyer.

Learn more
Investors benefit from historic stimulus, by Chris Evers and Patrick Weyer
Tax updates for investors, a Money Talk Video with Dave Sandstrom
Required Minimum Distribution Calculator, from Investor.gov
RMD FAQ page, from the IRS
Retirement requirements: Distributionsa Money Talk Video with Dave Sandstrom
Retirement spending with heirs in mind, a Money Talk Video with Dave Sandstrom
Bigger Bang from charitable distributions, a Money Talk Video with Art Rothschild
When should I …take my required minimum distribution?
When should I …check my beneficiaries?
(initially posted May 28, 2020)

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