With people living longer and benefiting from the long-running bull market, there are more factors to consider in taking required minimum distributions (RMDs) from retirement accounts. The traditional IRA, SEP IRA and 401(k) plans offer tax deductions on contributions and tax-deferred growth on earnings during the accumulation phase, but eventually the government wants you to pay taxes on that money.
Be aware that the IRS has proposed a new update to the life expectancy tables used to calculate annual RMDs for the first time since 2002. The proposed changes, which are not expected to go into effect until 2021, would likely reduce the RMD amount for many retirees, based on today’s longer life expectancies.1
Some retirees who have saved and invested well may find they do not need these distributions for their day-to-day expenses. Therefore, it’s a good idea to have a strategy for where to allocate these funds based on your longer-term goals, such as plans for beneficiaries, charitable giving or to have them available for medical or caregiving expenses down the road. Please give us a call if you’d like to discuss strategies for your RMDs moving forward.
How you handle RMDs can be especially important for your spouse. You may want to consider reinvesting a portion of your withdrawals for growth opportunity if there is a significant age difference between you and your spouse.
In late December, President Donald Trump signed into law the Setting Every Community Up for Retirement Enhancement (SECURE) Act. Among its many provisions is the ability for retirees to delay taking RMDs until age 72 (up from the current age of 70½). Be aware that this change applies only to people who turn 70½ after Dec. 31, 2019.2
Once you begin taking RMDs, please know that you have options; you don’t just have to convert long-time investments into cash. Strategic alternatives include:3
- Making a qualified charitable donation (up to $100,000 a year) directly from your IRA to a charity.
- Paying taxes on the RMD and then putting those funds into a Roth IRA, which continues to grow tax-free and can be inherited free of inheritance tax. There are also no RMDs for a Roth. Note that you must be eligible for a Roth based on your income.
- Contributing the funds to a grandchild’s education via a 529 college savings plan, where earnings are tax-free as long as they’re used for qualified education expenses (you may even be able to deduct contributions on your state tax return).
Another option is to reposition assets before RMDs kick in to purchase a qualified longevity annuity contract (QLAC). This strategy allows you to defer your RMDs until you need the income (up to age 85), at which point you can receive guaranteed monthly payments for the rest of your life. The IRS limits the total contribution to 25 percent of the assets in the IRA, up to a maximum of $130,000.4
1 Jeffrey Levine. Nerd’s Eye View. Nov. 13, 2019. “IRS Proposes New RMD Life Expectancy Tables To Begin In 2021.” https://www.kitces.com/blog/irs-proposes-new-rmd-life-expectancy-tables-to-begin-in-2021/. Accessed Jan. 3, 2019.
2 Stephen Miller. Society for Human Resource Management. Dec. 20, 2019. “SECURE Act Alters 401(k) Compliance Landscape.” https://www.shrm.org/ResourcesAndTools/hr-topics/benefits/Pages/SECURE-Act-alters-401k-compliance-landscape.aspx. Accessed Jan. 3, 2019.
3 RBC Wealth Management. “Five strategies for taking your required minimum distributions.” https://www.rbcwealthmanagement.com/us/en/research-insights/five-strategies-for-taking-your-required-minimum-distributions/detail/?utm_id=wm1552523589020191. Accessed Jan. 3, 2019.
Neither the firm nor its agents or representatives may give tax advice. Individuals should consult with a qualified professional for guidance before making any purchasing decisions.
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We are an independent firm helping individuals create retirement strategies using a variety of insurance and investment products to custom suit their needs and objectives. This material is intended to provide general information to help you understand basic financial planning strategies and should not be construed as financial or investment advice. All investments are subject to risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.
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