As part of the economic relief legislation passed to help with the coronovirus, Congress removed the requirement that people age 70 1/2 and older take their required minimum distribution this year. This leaves many taxpayers wondering, should I skip my RMD this year.
Tax Benefits of Skipping RMD This Year
Usually anyone above the age of 70 1/2 years old is required to withdraw a minimum amount from their tax-advantaged accounts each year. The amount is calculated based upon an IRS provided actuarial table, and the amount of money in the taxpayer’s accounts. The calculated amount must be withdrawn from the accounts, and becomes taxable income. Higher taxes are the result for most people.
The main benefit of skipping the required minimum distribution is lower taxes for the 2020 tax year. Distributions from non-Roth IRA, tax-advantaged accounts such as IRAs and 401ks are taxable income. Not only do taxpayers have to be taxes on the distribution, but the money withdrawn increases the taxpayers overall taxable income. The higher taxable income may reduce or eliminate certain tax deductions or credits that are limited to taxpayers with lower incomes. The $1,200 stimulus payment itself was limited to taxpayers with incomes under $75,000 for single filers, and $150,00 for married joint filers.
By not taking a required minimum distribution, retirees and other taxpayers reduce their overall taxable income. Unlike most RMD maneuvers, like waiting until the next year to take your RMD if the day you turn 70 1/2 is at the right time, skipping your RMD in 2020 does NOT have to be made up by taking it in the following year.
For taxpayers who were planning on doubling up on their required minimum distribution in this manner during 2020, they can skip BOTH RMDs.
Investment Benefits of Skipping RMD for 2020
The other benefit of skipping the required minimum distribution for 2020 is that most investors have losses, some of them very steep. By holding on to your investments in a diversified portfolio for the long-term, it is very likely that some, or all of those losses will be recovered during the coming years. If that is the case, then selling now, locks in losses that could be otherwise recovered by staying invested rather than selling to complete the RMD for 2020.
Who Should NOT Skip RMD This Year?
There are some taxpayers who should not skip their RMD for 2020. Of course, retirees who need to withdraw from their retirement accounts should withdraw the amount their financial plan calls for, or withdraw how much they need to live on for 2020.
Other taxpayers who may consider taking a withdrawal in 2020 are those who expect significantly higher income in 2021 and beyond. As of now, RMD requirements are not suspended beyond 2020. That means that retirees will need to take required minimum distributions in 2021. Those distributions will be calculated based upon the balance in the retirement accounts at the end of 2020.
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For those expecting significantly higher income in 2021, for example, those returning to work, withdrawing funds during 2020 would allow those amounts to be taxed at the lower tax bracket. With this reduced balance in the taxpayer’s retirement accounts, the calculated RMD for 2021 will be lower.
Keep in mind that RMD withdrawals are typically not particularly onerous for most taxpayers, so this maneuver is only useful for those expecting a fairly significant increase in income.
Skipping My RMD in 2020
For most taxpayers who do not require withdrawing from their IRA and 401k accounts for income, it will make sense to skip your RMD in 2020. For taxpayers expecting a significant shift upward in income, it would be wise to contact your financial advisor and tax professional to run the numbers and see what the best move is for you.