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As life expectancy increases, more people want to defer making withdrawals from their retirement accounts for as long as possible to ensure that their nest eggs will meet their retirement income needs. However, withdrawals must begin by a certain age to avoid penalties.
If you are at least age 72 as of 2020, you need to withdraw required minimum distribution (RMD) amounts from your traditional, SEP, and SIMPLE individual retirement accounts (IRAs). Depending on the provisions of the plan, you may also need to withdraw from your qualified, 403(b), or 457(b) plans.
Key Takeaways
- Some distribution strategies—such as equalizing balances for your beneficiaries and rolling over excess amounts—may help you maximize your returns and minimize your tax burden.
- The new age as of 2020 for taking required minimum distributions (RMDs) from your traditional, SEP, or SIMPLE IRAs is 72.
- The $2 trillion coronavirus emergency stimulus package suspended RMDs from retirement accounts for 2020.
RMDs Suspended Due to COVID-19
On March 27, 2020, President Trump signed a $2 trillion coronavirus emergency stimulus package called the CARES (Coronavirus Aid, Relief, and Economic Security) Act. It suspended RMDs for people ages 72 and older for 2020, allowing retirement accounts more time to recover from the year’s stock market downturn.
In normal years, you can apply certain strategies to your retirement account withdrawals that will help you to preserve your account balance. Here we highlight some of these considerations.
Strategic Ways to Distribute From Designated IRAs
If you own multiple traditional, SEP, and SIMPLE IRAs, you must calculate the RMD amounts separately, but you can aggregate and distribute the total from one or more of those IRAs. When determining the IRA from which you’ll distribute your RMD for the year, you may want to consider the following strategies.
Equalizing balances for your beneficiaries
If you have multiple IRAs because you want to maintain separate IRAs for different beneficiaries, consider equalizing the balances, which may have changed as a result of withdrawals, contributions, fees, and asset performance.
If you designated a different individual as the beneficiary for each of your three IRAs, for instance, and you want to leave all of them the same amount, you may withdraw your RMD amount from the IRA with the highest balance.
Alternatively, you may transfer amounts among the IRAs to equalize the balances and withdraw the applicable RMD amount from each IRA.
Culling low-performance assets
If you have multiple traditional, SEP, and SIMPLE IRAs, you can cull dead-weight assets from them by either liquidating the assets or distributing them from your IRAs. Check with your financial planner to determine whether there are assets that you should get rid of because they are either losing money or not performing as well as the other assets in your IRA portfolio.
If the plan is to get rid of those assets anyway, distributing instead of liquidating them could keep ticket charges (transaction fees) from being taken out of your IRA balance.
However, you must exercise caution when choosing this option. If the assets lose value after being distributed from your IRA, the upside is that you may be able to write off the losses, which would not have been an option had the losses occurred while the assets were in your IRA.
On the other hand, if the performance of those assets improves, you will owe income taxes on the earnings. Consider also that capital gain/capital loss treatment can be applied to the earnings/losses, an option not available for gains/losses that occur in your IRA.
Notifying your IRA custodians
If you plan to aggregate your RMDs and distribute the total from just one of the IRAs, be sure to notify the other IRA custodians in writing.
Most important, notify the custodian of the IRA from which you will be making the withdrawal in a timely manner to ensure your RMD amount is distributed by the deadline. This will help to ensure that you do not owe penalties for failing to make timely RMD withdrawals.
If you aggregate and then take distributions from just one IRA, don’t forget to notify IRA custodians who process automatic distributions that don’t require your authorization for each year’s RMD.
Strategic Ways to Distribute From Qualified, 403(b), and 457(b) plans
If you are still working for the employer that sponsored the qualified, 403(b), or 457(b) plan in which you participate, you may defer beginning your RMD until after you retire, if that option is available under the plan.
When determining whether you should defer receiving RMDs from such accounts, have your financial consultant assess the performance of the assets in your portfolio and your income needs. If the assets are not performing well, it may not make good financial sense to keep the amounts in your qualified plan account.
On the other hand, consider that withdrawing amounts from your qualified plan will increase your taxable income for the year and could possibly put you in a higher income tax bracket. If you need the assets to cover your expenses, then this is a non-issue. However, if you already have other sources of income that are sufficient to meet your financial needs, it may not be such a good idea to withdraw amounts that would continue to accrue earnings on a tax-deferred basis if left in your qualified plan account.
Rolling Over Excess RMD Amounts
If you find that you have withdrawn more than is required to meet your RMDs and do not need the extra amount to cover your expenses, you can roll over the excess amount within 60 days of receipt. This will help you to preserve your retirement account balance and allow the extra amounts to continue accruing earnings on a tax-deferred basis.
The Bottom Line
Taking RMDs from your retirement account is inevitable, but as with most inevitable occurrences, timing and execution can determine the end results. Be sure to consult with your financial planner about these strategies and discuss whether other options may suit your financial profile.
