The CARES Act, which was passed this year to help ease the financial strain of Covid-19, creates a unique planning opportunity for retirement accounts in regards to required minimum distributions (RMDs). Under the CARES Act, the RMD has been eliminated for 2020. If you have already taken the RMD, under most circumstances, you have until August 31st, 2020 to return it to the IRA without it being taxable.
If you or someone you know is over the age of 70 1/2, they likely can take advantage of this unique tax planning opportunity using one of several strategies outlined below.
As a reminder, RMDs are the minimum amount that the IRS requires you take out of a retirement account and pay taxes on each year. If it is your own account, they usually begin between the age of 70 and 72. If it is an inherited account, you may be required to take them sooner.
Example – John has a $1,000,000 IRA and is required to take out $40,000 each year, which is subject to roughly 30% in taxes for him between federal and state. On this distribution, he owes about $12,000.
Using the above example, below are 4 strategies that we have considered for clients.
John could -
- If he has already taken the $40,000, he could return it by August 31st and save roughly $12,000 off his 2020 tax bill.
- If he has not taken it, he could talk forgo taking it and save a similar amount.
- Instead of returning it or not taking it, he could convert the amount to a Roth IRA where it would still be taxable but begin to grow tax-free.
- He could still take it and spend it as planned!
Disclaimer: Alex Voorhees and Reston Wealth Management do not provide legal, accounting or tax advice. This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified investment, tax or legal advisor. The opinions voiced in this article are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) or strategies may be appropriate for you, consult your financial advisor prior to investing. No strategy assures success or protects against loss. You should consider the investment objectives, risks, charges and expenses of any investment carefully before investing.