Federal emergency aid legislation suspends required minimum distributions (RMD) for 2020. If you do not need the income from your IRA or retirement plan, here are tips to maximize the benefit and build your retirement income portfolio.
Background: Before 2020, individuals were required to take withdrawals annually from federally qualified retirement accounts at age 70½. After the SECURE Act was passed in 2019, the RMD age was changed to72. The amount of your distribution is based on an actuarial calculation of life expectancy published by the IRS.
What’s New. CARES Act, which became effective March 27, 2020, waives RMDs for 2020. If you don’t need the distribution to pay expenses or debt, you may elect to skip your distribution for 2020.
Roll It Over. Rolling over the distribution into your plan defers the taxes and extends effectively tax-free compounding of a distribution that otherwise possibly could have been taxable income. But there is a better idea.
Roth It! Since you can waive your RMD this year, consider doing a Roth conversion. The Roth allows for tax free growth whereas a traditional IRA allows tax deferred growth.
In this period of social distancing, many individuals 65 and older are staying home and their expenses are lower than expected. Optimizing the 2020 waiver on RMDs from IRAs and qualified plans, such as 401(k)s, 403(b)s, and defined benefit (DB) plans, may require further planning. We welcome your questions about how to evaluate your personal situation.
Stay safe and healthy!
Jim Joseph, CFP®