The return of required distributions
The one-year waiver from mandatory IRA withdrawals is over.
“Those required distributions are back on the table,” Kyle Tetting said on a recent Money Talk Podcast. “So, if you are 72 or older, know that we need to get in touch with you at some point in time this year to talk about how you want to handle that.”
At issue is the required minimum distribution (RMD) that older retirees must take each year from tax-advantaged retirement accounts such as IRAs and 401(k)s. Congress suspended the requirement in 2020 as part of a $2.2 trillion economic stimulus package.
RMDs are back on for 2021.
Typically, individuals who do not take their RMD face severe penalties on top of the taxes they would owe.
The IRS determines the size of the distributions by the investor’s age and account balance. What to sell and when and what to do with the distributions are discussions to have with investment advisors and tax professionals.
‘It’s very different for every investor,” Dave Sandstrom said on the podcast. “You have to look at your own personal situation.”
If you rely on the distribution to help meet living expenses, Dave said, you might consider capitalizing soon on gains in profitable funds and squirreling away the proceeds for spending needs.
- Investors who took a holiday from their RMD in 2020 should not expect a Form 1099-R for their 2020 taxes.
- Investors who contributed their RMD directly from their account to a qualified charity should receive a 1099-R, but it won’t show that the distribution went to charity. Investors need to report the qualified charitable distribution on their tax return or the IRS treats the distribution as taxable income.
“However, if you’re in a situation where you don’t need the money, then maybe there isn’t as much pressure to make a quick move on that,” Dave said. “Some investors choose to maybe let it ride for the year, and certainly if markets continue to extend, you can trim some winners at the end of the year. And if you run into a situation where markets take a step backwards and you have a good balanced portfolio, you have bonds that you can access at that point.”
Brian Kilb told Dave and Kyle that he uses RMD discussions as opportunities to help clients rebalance their portfolios based on market currents and what the clients want and need. As an example, he said an investor looking for their portfolio to lean more toward non-U.S. holdings might consider taking their distributions from domestic funds.
“I do think the investment side is one way to help determine whether taking that RMD now or not is useful,” Brian said in the podcast. “How does it play into your portfolio management, and what decisions can you make by doing that?”
Kyle noted that investors have options for where their distributions go. For instance, under certain circumstances they could go directly to a qualified charity for a tax-free qualified charitable distribution. Investors also can move shares from an IRA to a taxable account, but they would have to cover the taxes they’d owe on the distribution.
“A lot of these conversations have to do with the ultimate tax impact of that money coming out,” Kyle said. “While we can help you think through that, a lot of times that’s a conversation for you to have with your CPA, your tax preparer, because they’re the ones who are going to be able to tell you here’s what the ultimate tax impact of that will be.”
Investors 72 and older have until the end of the year to take their required distribution, but Kyle advocates strategizing with advisors sooner rather than later.
“If you want to wait until December — because it’s got to be out by December 31st — you may have lost the opportunity for some of the things you wanted to do early on,” Kyle said.
“It all comes down to the individual investor. It all comes down to what they need from their portfolio, what they want from their portfolio and when they want it. So, absolutely have those conversations early. Absolutely do the planning piece.”
Income, tax holiday for older retirees, from Money Talk
Required Minimum Distribution Calculator, from Investor.gov
RMD FAQ page, from the IRS
Retirement requirements: Distributions, a Money Talk Video with Dave Sandstrom
When should I …take my required minimum distribution?
When should I …check my beneficiaries?
(initially posted January 28, 2021)
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