The stimulus bills enacted in 2020 have not just put extra money in taxpayers' pockets (be it temporarily with the delay of the filing deadline or permanently with cash payments to those under a certain income threshold); they have altered the Required Minimum Distribution (RMD) rules. In previous posts, I have covered changes brought about by the SECURE Act and then how to plan for changes in rules for Inherited IRAs. Now let’s tackle the changes in RMDs.
Taking Advantage of the Extension to Age 72
When clients think of their retirement income, it’s easy to think of the “what” (investments, Social Security benefits) and “where” (IRA account, taxable brokerage account), but sometimes not the “when” and “how”.
In regards to the “when”, the new rules now allow an extra year or two for a client to consider a Roth IRA conversion. This strategy is best suited for the client who does not have significant taxable income and retires before they begin taking Social Security income and the new 72 RMD age. At the very least, Roth conversions should be considered up to an amount that keeps the IRA owner in the same marginal tax bracket. By paying the tax on a Roth IRA conversion in years where you otherwise have little to no taxable income, you can lessen the tax impact of taking larger RMDs from a traditional IRA account beginning at age 72.
As far as the “how” is concerned, the method in which income is taken should be analyzed. Proper financial planning begins with a cash flow model, and the new RMD rules now allow planners to revisit where a client is going to receive income during the years they turn 70 and 71. Previously clients assumed they would begin receiving RMD withdrawals at age 70. Now is the time to reconsider how you will be receiving income; sources such as pre-planned cash reserves or an income-focused taxable investment portfolio may now be more viable options than taking IRA distributions earlier than planned.
The Coronavirus Aid, Relief, and Economic Security (CARES) Act
The recently passed CARES Act adds another reason to consider a Roth IRA conversion. RMDs in 2020 have been suspended; therefore, a retiree who otherwise would be taking an RMD can now convert that amount to a Roth and let it grow tax-free until it can be withdrawn tax-free after five years. While tax will be paid on the conversion, it will be consistent with the amount expected had the RMD been taken and will prevent a larger distribution than expected next year (and thus, potentially a higher tax paid).
Since every person’s retirement is unique, we recommend consulting with your financial team of advisors to plan the best path forward.
The views and opinions expressed herein are those of the author(s) noted and may or may not represent the views of Capital Analysts or Lincoln Investment. The material presented is provided for informational purposes only. You should discuss any legal, tax or financial matters with the appropriate professional.