RMDs Are Back. What's Your Strategy?

Shortly after the pandemic hit, the CARES Act was passed in March 2020, allowing those age 72 or over to waive their required minimum distributions, or RMDs. While that resulted in a significant reduction in taxable income for many retirees in 2020, RMDs are back this year, along with the potential tax burden and steep penalties (50% of the required distribution amount) for those who fail to take them by year end. In addition, many retirees, especially those who did not take RMDs last year, may be subject to higher distribution amounts this year, due to higher account balances. That makes it even more important to have a strategy in place for managing RMDs.

RMDs are commonly used to supplement income received in retirement from guaranteed income sources, such as Social Security or a pension. You can choose to take RMDs on a regular schedule throughout the year, such as monthly, quarterly or semiannually, or once a year as a lump sum. However, it’s important to remember that distributions from qualified retirement accounts are taxable, so if you choose not to have taxes automatically withheld, you’ll need to set money aside to pay any taxes owed on your distributions.

Should You Take Regular Distributions or a Lump Sum?

Many people find it easier to manage their income and expenses in retirement by taking distributions throughout the year. In addition to providing regular cash flow, regular installments can help ensure that you receive a range of prices for the assets you sell, which may provide some stability during periods of increased market volatility. Regularly scheduled distributions can also help retain the benefits of tax-deferred compounding in your retirement account(s) throughout the year, versus taking a lump sum withdrawal at the beginning of the year. If you don’t need the regular income, waiting until year-end to take a lump sum distribution may also help bolster tax-deferred growth, as your money remains invested in your account(s) throughout the year. However, because markets fluctuate over time, there is no guarantee that account values will be higher or lower at the time you take your distribution(s). In addition, taking a large lump sum withdrawal may also create the need to rebalance your portfolio.

Managing Your Tax Burden

There are many ways to help manage taxes associated with RMDs. Those who may not need the income from an RMD, and are seeking to avoid taxable distributions, may choose to make a qualified charitable distribution (QCDs). A QCD allows you to donate up to $100,000 annually directly from a traditional IRA to an eligible charitable organization without counting that amount as taxable income. Instead, it would count toward your RMD and reduce the taxable amount of your mandatory withdrawal.  Other options for managing taxes on income in retirement may include a Roth IRA conversion, which requires paying taxes on any amounts converted in the year assets are converted. (Roth IRA accounts are not subject to RMDs). Since these strategies are complex and may have significant tax consequences, it’s important to meet with your tax and financial professionals before taking action.

If you have questions, call the office to schedule time to talk about your retirement income strategy.

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^{This communication is designed to provide accurate and authoritative information on the subjects covered. It is not however, intended to provide specific legal, tax, or other professional advice. For specific professional assistance, the services of an appropriate professional should be sought.}