Last year, required minimum distributions were waived and that worked out great for people who stayed invested. For 2021, they are back on and if you are 72 or turn 72 during 2021 plan to take a RMD this year.
In 2020, the SECURE Act, increased the age at which people must take required RMDs from 70 ½ to 72. The CARES Act then allowed people to skip their RMD for 2020. This waiver will not continue in 2021 and people who meet the requirements will need to take their RMDs
If you are a client, we are already tracking if you need to take your RMD. For people who are not clients, remember there is a penalty for not taking your RMD. If you do not take it or only take part of it, there is a 50% penalty on what you were supposed to withdrawal. For example, if your RMD is $10,000 and you take a $2,000 distribution, you will pay a penalty of $4,000 (50% of $8,000).
The minimum distribution rules discussed apply to:
- Traditional IRAs
- SEP IRAs
- SIMPLE IRAs
- 401(k) plans
- 403(b) plans
- 457(b) plans
- profit sharing plans
- other defined contribution plans
- Inherited IRAs (5-year rule)
Reminder: Roth IRA owners get the continued benefit of no RMD’s.
What to do with your RMD?
1. Use it for expenses
When building your financial plan, RMDs are a common source of income. Many people use their RMDs to pay for their retirement expenses.
For some retirees, they may have enough income from their pension, social security, or other sources to cover their expenses. If you fall in this bucket, you can reinvest your money in a taxable brokerage account.
3. Give money to loved ones
You can fund a 529 plan for child or grandchild. This would be a great way to give someone a head start on their college savings. The money will continue to grow tax deferred and can be withdrawal tax-free.1
Another option is to gift up to $15,0000 to one person. You will still have to pay taxes on your RMD but the recipient will not. If you give over $15,000, you will be subject to the gift tax.
4. Donate to charity
Tax free donations are allowed up to $100,000 to a qualified charity2. You need to transfer the money directly from the IRA to the charity for it to count for a tax-free transfer. This is a great way to satisfy your RMD requirement and give back to charity
If you have any questions about your RMD options, please do not hesitate to give us a call at 847-550-6100.
1 Non-qualified withdrawals are subject to federal and state income taxes and a 10% penalty.
2 To avoid paying taxes on the donation, the donor must follow the IRS rules for qualified charitable distributions (QCDs)—charitable IRA rollovers. Most churches, nonprofit charities, educational organizations, nonprofit hospitals, and medical research organizations are qualified 501(c)3 organizations. The charity will also not pay taxes on the donation.
All investing involves risks including loss of principal. No strategy assures success or protects against loss. Please consult your financial advisor regarding your specific situation. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual