2020 Changes to RMD
Dylan Telerski / 30 Jul 2020 / Retirement Trends
A 401(k) is an optimal tool for reducing your tax liability, but you can’t dodge payment to Uncle Sam forever. Required Minimum Distribution rules ensure that people do not accumulate wealth in tax-free retirement savings accounts to leave as an inheritance.
Once employees with 401(k) or IRA accounts reach a certain age, they must withdraw a minimum required amount from their funds. The withdrawal is generally included on income tax forms, with the exception of a Roth account that was already taxed when first contributed to the account. Your RMD is calculated by your retirement account balance as of December 31 of last year, divided by your Life Expectancy Factor.
In 2019, U.S. workers had to take their RMDs at age 70.5, but much has changed amid the global pandemic crisis. The Setting Every Community up for Retirement Enhancement (SECURE) Act and the Coronavirus Aid, Relief, and Economic Security (CARES) Act both include provisions affecting RMDs in 2020.
Continue reading or contact your 401(k) plan provider with specific questions about 2020 RMD changes.
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The starting age for RMDs increased from 70.5 to 72 – but not until 2021.
- In late 2019, the SECURE Act increased the age for RMDs to 72.
- In March 2020, the CARES Act waived RMDs altogether for the 2020 calendar year.
- If you turned 70.5 by the end of 2019, resume taking your regularly scheduled RMDs in 2021.
- If you were under 70.5 by the end of 2019, you don’t have to take your RMD until April 1 after you’re 72.
Those over 70.5 can undo RMDs already taken this year if they are eligible for a rollover.
- RMDs can be rolled back into the retirement account if you have received the funds within 60 days.
- RMDs must be directly rolled, but can be taken even if you have completed a rollover within the year.
- Non-spouse beneficiaries can undo RMDs already taken as long as they do so by August 31, 2020.
- Rolling the money back means you do not have to include these amounts on your 2020 income taxes.
Beneficiaries can take the year off RMDs
Prior to 2020, inheriting an IRA or 401(k) account meant taking RMDs based on one’s own life expectancy. This was great news for young heirs who were able to stretch tax deferral for decades. However, this changed with the SECURE Act.
- Heirs must now draw down the inherited account within 10 years if inherited in 2020 or later.
- Beneficiaries can skip RMDs for 2020, but they may want to take them if they need the cash now.
- Holding off on RMDs for a Roth account makes sense, as you accrue tax-free money for a longer time.
- IRA beneficiaries operating under the five-year rule can take one extra year to draw down the account.
Should you take your RMD in 2020?
The question as to whether or not you should take advantage of the RMD waiver is a personal one.
YES, TAKE IT if…
- You were planning on these distributions for your living expenses in retirement.
- You risk getting bumped into a higher tax bracket with a higher balance and withdrawal percentage.
NO, HOLD OFF if…
- You don’t need the full amount to cover your costs, and you’d like to reduce taxable income for 2020.
- Some of your investments have decreased in value due to the downturn, and you’d rather wait to sell.
You may also consider taking a distribution this year, but capping it so that you won’t move into a higher tax bracket or trigger steeper Medicare premiums. Whether you’d like a full annual/quarterly/monthly RMD, a partial RMD, or a deferred RMD, you’ll need to contact your Third Party Administrator to discuss your preferences.
Ubiquity is a flat-free 401(k) plan provider that can offer free, efficient, expert advice on retirement savings. Questions about retirement planning? Employers and employees alike may contact us for details.