After decades of saving for retirement in tax-deferred IRAs and 401(k)s, you finally have to take the money out (and pay taxes on your withdrawals) when you reach your 70s. But there have been two major changes to the required minimum distribution rules within the past year. First, the SECURE Act, which became law on December 20, 2019, raised the age for taking your first RMD from 70 ½ to age 72 starting in 2020. And a few months later, the Coronavirus Aid, Relief and Economic Security (CARES) Act waived the RMD requirement for everyone in 2020 because of the financial challenges from the coronavirus. Whether you just started taking RMDs or have been taking them for years, you don’t have to take a required withdrawal in 2020.
Because of these recent rule changes, there are some special strategies for dealing with retirement plan withdrawals for 2020 — which can help you this year or in future years. Here are some of your options:
— If you already took your RMD for 2020, you can put it back in.
Some people had already taken their RMD for 2020 before the CARES Act was signed into law on March 27, 2020. They have until August 31, 2020, to put the money back into their account, where it can continue to grow tax-deferred for the future. If you want to re-deposit your RMD, contact your IRA or 401(k) administrator right away to find out the procedure, since time is running out for this option.
But before you race to put the money back into the account, think about the longer-term impact. If you need the money to pay your bills or have already used it for other purposes, you don’t have to put it back into the account. And consider that money you take out of the account this year can help reduce your RMDs in the future. If your tax bracket is lower this year than you expect it to be in future years, it might actually help to take some money out now rather than have larger RMDs in the future. Or you may want to put the money back in but convert it to a Roth IRA (see below).
— Consider converting money from a traditional IRA to a Roth. This can be a good year to make a conversion from a traditional IRA to a Roth. You have to pay taxes on the conversion (although a portion may be tax-free if you made any non-deductible contributions), but then the money grows tax-free in the Roth IRA after that, and you won’t have to take RMDs from the Roth.
You can convert money from a traditional IRA to a Roth at any age, and this year can be a particularly good time to make a Roth IRA conversion if you’re 72 or older. You usually have to take your RMD for the year (and pay taxes on the withdrawal) before you can convert money from a traditional IRA to a Roth. But since you don’t have to take RMDs in 2020, you can just make the conversion instead — and have the same tax liability you would have had from the RMD, but keep the money growing tax-free in the Roth for the future. For more information, see The right time for a Roth IRA conversion?
— You can give your RMD to charity. If you’re 70 ½ or older, you can transfer up to $100,000 tax-free from your IRA to charity each year, called a “qualified charitable distribution” (QCD). The money you transfer usually counts as your RMD but isn’t included in your adjusted gross income. (Even though the SECURE Act increased the age for starting RMDs from 70 ½ to 72, you can still make a QCD anytime after you turn age 70 ½.) Even though you don’t have to take RMDs this year, you can still make a QCD and transfer money from your IRA to charity if you’d like. It’s one way to find money to help the charity, and moving money from your IRA this year can help reduce your RMDs for future years, giving you a longer-term tax benefit from the move.
You can’t double dip and take a charitable tax deduction for money you give to charity through a QCD, even if you itemize, but making the tax-free transfer to charity keeps the money out of your adjusted gross income, which can help reduce other expenses. For example, the QCD isn’t included in the calculation for the Medicare high-income surcharge, which increases Medicare Part B premiums for people whose adjusted gross income is higher than $87,000 if single or $174,000 if married filing jointly (see this table at Medicare.gov for more information). It also keeps the money out of the calculation to determine whether any of your Social Security benefits are taxable (see this page at SocialSecurity.gov for more information).
To make a QCD, contact your IRA administrator and ask about the procedure — the transfer has to be made directly from the IRA to the charity to stay out of your adjusted gross income. Contact the charity and let them know the money is coming, so they’ll be prepared to send you an acknowledgement for your tax records.
Planning for future RMDs. Before you decide whether to make any of these IRA moves this year, consider the impact on future RMDs. You’ll need to start taking RMDs again next year, at least under the current law, and the less money you have in the account by December 31, 2020, the lower your RMD will be for 2021.
If your tax bracket is lower this year than you expect it to be in the future, this could be a good year to withdraw some money from your traditional IRA or convert it to a Roth. Consider the longer-term impact on your retirement withdrawals when making the most of your special options for 2020.
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