retirement

The Answers to More RMD Questions

The CARES Act made 2020 required minimum distributions optional. But what are your next moves?

When the CARES Act made required minimum distributions optional for 2020, the legislation left readers with many more questions about when they could return those distributions to an individual retirement account or whether they should convert the equivalent of the RMD to a Roth. Here are our replies.

I took my RMD more than 60 days ago in 2020. Can I return it to my IRA? It depends. The IRS recently issued new guidance that gives some people more time to return the money using an indirect rollover. If you took an RMD between Feb. 1 and May 15 and haven’t made any other indirect rollovers in the past year, you now have until July 15, 2020, to roll over the money into an IRA. If you took the money in January, you’re out of options now, but don’t lose hope. Between now and next April 15, when the taxes on those distributions are due, the IRS could come out with additional clarification that gets even those early birds off the hook. So stay tuned.

If I don’t have to take an RMD from my regular IRA in 2020, would it be beneficial to convert this same amount to my Roth account and pay the taxes incurred on that amount? Skipping your 2020 RMD and converting that same amount to a Roth is an excellent idea. Because Roths are funded with after-tax dollars, the money withdrawn in retirement is tax free, and Roths have no RMDs.

By not taking the RMD from a traditional IRA this year, you have more room to convert the funds without triggering a much higher tax bill. In any other tax year, the RMD and the Roth conversion amount would both be added to your overall annual taxable income, potentially launching you into a higher bracket. “A Roth conversion is a bet that your taxes will be higher in the future,” says Evan T. Beach, director of wealth advisory for Campbell Wealth Management. “You know that next year your taxes will be higher if for no other reason than that you’re going to have to take an RMD.”

What about a qualified charitable distribution? Can I roll it back, and if not, how will that money be taxed? Because QCDs are distributions given directly to charity, you might be able to stop payment on the check before the charity gets it and then roll over the money. But you would have to act fast. Once the charity cashes the check or the funds are transferred to its account, you can’t get the money back to roll it over. And we’re not sure why you would want to. “QCDs are the most tax efficient way to give to charity,” says Ben Barzideh, wealth adviser for Piershale Financial Group. Because the distribution bypasses you, it isn’t added to your taxable income, so the net effect is zero. Plus, you can still qualify for the standard deduction, which nearly doubled in value beginning in 2018.

Does this new rule apply to income annuity payments? Do you know of a way to stop payments for one year only and to resume again in 2021? From a tax standpoint, the IRS treats all traditional IRAs as one pot, regardless of how the money is allocated, whether in annuities or some other investment. So, if you have an IRA annuity, the waiver does apply, but it will also depend on the insurance company and the annuity. “There are annuities that allow you to turn (the payments) on or off,” says Beach. If your annuity is one of them, then you can hit the pause button for 2020 and resume next year. Check with the insurer to determine what kind of annuity you have and whether the waiver can apply.

With 2020 RMDs for IRAs waived, my wife and I plan to skip taking an RMD this year. This will result in us having a significantly lower AGI for 2020. Will the Social Security Administration consider adjusting the IRMAA surcharges down for the remainder of 2020 since our AGI is lower? The income-related monthly adjustment amounts, or IRMAAs, that determine how much you pay for Medicare Part B and Part D plans rely on a formula specified in the Social Security Act. That formula bases the rates on your adjusted gross income from two years before. Although your IRMAAs will remain the same for this year, you should see your lower AGI reflected in the rate you pay in 2022.

Most Popular

Child Tax Credit 2021: Who Gets $3,600? Will I Get Monthly Payments? And Other FAQs
Coronavirus and Your Money

Child Tax Credit 2021: Who Gets $3,600? Will I Get Monthly Payments? And Other FAQs

People have lots of questions about the new $3,000 or $3,600 child tax credit and the advance payments that the IRS will send to most families in 2021…
April 14, 2021
The Wrong Way to Achieve Wealth
personal finance

The Wrong Way to Achieve Wealth

For some down-to-earth, basic advice on money and life, I have a book to recommend: “Your Total Wealth: The Heart and Soul of Financial Literacy.”
April 17, 2021
2021 Child Tax Credit Calculator
Tax Breaks

2021 Child Tax Credit Calculator

See how much money you'll get in advance under the new child tax credit rules for 2021.
April 14, 2021

Recommended

What You Need to Know about College 529 Savings Plans
529 Plans

What You Need to Know about College 529 Savings Plans

Do you know how much you’re able to contribute or what the funds could be used to pay for? How about how contributing affects your taxes? Check out th…
April 14, 2021
37 Ways to Earn Extra Cash in 2021
business

37 Ways to Earn Extra Cash in 2021

We flag a wide variety of cool side hustles to earn bonus bucks to cover expenses expected and unexpected as we begin to emerge from the pandemic lock…
April 8, 2021
10 Questions Retirees Often Get Wrong About Taxes in Retirement
retirement

10 Questions Retirees Often Get Wrong About Taxes in Retirement

You worked hard to build your retirement nest egg. But do you know how to minimize taxes on your savings?
April 7, 2021
7 Ways to Save Money When Shopping Online
Smart Buying

7 Ways to Save Money When Shopping Online

Shopping online has long been a popular option. In these times, it’s increasingly a must. Here’s how to save money when filling your cart with the cli…
March 23, 2021