The government suspended required minimum distributions — but should you still take one before year’s end?
Required minimum distributions from most retirement accounts have been suspended for 2020, but some Americans may benefit from taking a withdrawal regardless this year.
The CARES Act — legislation passed at the height of the pandemic to assist Americans financially and medically — allowed Americans to forgo required minimum distributions, which is the amount of money investors must take from most qualified retirement accounts, like a 401(k) or traditional individual retirement account, by 72 years old. Although many Americans must tap into their retirement savings prior to this age out of necessity, there are individuals who don’t need or want to withdraw the money.
While that may be the case, 2020 could still be a good year to take RMDs, some advisers say. “Just because it’s not required doesn’t mean it won’t still be advantageous,” said Brian Hughes, a financial adviser at River City Wealth Management.
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Much of the decision depends on the tax implications. If an individual is in a low tax bracket and expects to be in a higher tax bracket next year, taking an RMD makes sense because they’ll pay less tax on the distribution, Hughes said. This is especially true given the uncertainty of tax brackets in the future — President-elect Joe Biden, for example, has proposed a tax increase for people making more than $400,000. “If this goes through, taxes may increase for many Americans,” said Brad Lineberger, president and founder of Seaside Wealth Management. “Taking your RMD this year allows you to pay taxes at a lower bracket.”
Because there’s no requirement, retirees could withdraw a small portion of their accounts, in an attempt to take advantage of the low tax environment but spread out the tax burden.
Some advisers suggest using this time to conduct a Roth conversion. With a Roth conversion, Americans can move pre-tax dollars in traditional IRAs into a Roth account, paying the tax on that converted amount at a lower tax rate. “Same tax consequence, but tax-free growth going forward,” said Matt Bacon, a financial adviser at investment planning firm Carmichael Hill.
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Taking minimum distributions now allows individuals to control their taxable income in the future, thus helping people keep Medicare premiums low down the line, said Diane Pearson, a financial adviser at Pearson Financial Planning. But those looking toward Medicare coverage should beware — Medicare assesses additional charges based on income tax returns from two years before, so individuals may not want to be too aggressive with IRA distributions so as not to inflate their modified adjusted income, said Judson Meinhart, manager of financial planning at Parsec Financial.
Still, some advisers recommend forgoing the RMD until next year. Avoiding unnecessary distributions offers investors the ability to let their money continue to grow without taxation, said Larry Luxenberg, a principal at Lexington Avenue Wealth Management. “The deferral of taxes is a powerful tool for preserving or increasing wealth.”
Now is the time to review your assets and tax liabilities for the year and consult a financial professional who could help you make the best decision for your money. “RMD or not, getting as much money out of your IRA and paying as little in taxes as possible should be a priority for all older Americans,” Meinhart said. “That’s why even though it’s not required, it might make sense to take a distribution from your IRA this year.”
