If you are over age 70 and have an IRA, then read on. If you are under age 70, you might just want to go watch the Weather Channel instead.
Generally, folks who turned age 70 ½ before January 2020 are required to withdraw funds from their IRA or other retirement accounts and report such withdrawals as income on their tax return.
These required minimum distributions, or RMDs, are based on your life expectancy and the year-end balance in your account. For many retirees, these RMDs are the major reason they have to pay income taxes. Failure to take the RMD out of the account can result in stiff penalties.
For the year 2020, Congress has suspended the RMD rule under the CARES Act. This means you don’t have to pull the money out of the IRA account and presents a one-time opportunity to save some taxes. For example, suppose your RMD for 2020 is $25,000 and your federal and state tax rates combined are 20 percent. If you take the $25,000 from the account, you will owe $5,000 in taxes.
Of course, you need the funds to live on, right?
Well, suppose you have a savings account or CD in a non-retirement account in the amount of $25,000. You can withdraw these funds with virtually no tax liability. This gives you a one-time tax savings of $5,000. Pretty nice tax break, huh!
Since we are half way through the year, you may have already been taking distributions from your IRA. Continuing the example above, say you have withdrawn $12,500 to date from the IRA. An IRS notice recently provided that such funds can be repaid and thus treated as though they were never taken out in the first place. However, you only have until August 31 to repay such funds.
Will I have to withdraw twice as much in 2021 if I don’t take the RMD this year? No! At this time, we expect the normal schedule of RMDs to resume in 2021.
What if I use my IRA to make charitable contributions, also known as qualified charitable distributions (QCDs)? Then keep doing it. This is a tax-smart way to give to charity for folks subject to RMDs. The suspension of RMDs in 2020 does not affect this strategy.
Admittedly, this is all a bit confusing. You may want to consult your tax professional as to how you might take advantage of this. But it could save you some big bucks. Which might make this COVID-19 pandemic a little less painful!
Dr. David Ashby is a Certified Financial Planner and the retired Peoples Bank Professor of Finance at Southern Arkansas University. He holds degrees in accounting and business administration and a doctorate in finance from Louisiana Tech.