For 2021, the IRS is again enforcing required minimum distributions (RMDs) from retirement accounts after a one-year hiatus due to the COVID-19 pandemic. However, the rules for taking RMDs have changed since the SECURE Act went into effect on Jan. 1, 2020, and those individuals who do not rely on RMDs for retirement income may have some opportunities to take withdrawals that are less than the required amounts this year.
Congress enacted the Setting Every Community Up for Retirement Enhancement Act (SECURE Act) to help more Americans prepare and plan for greater financial security during their retirement years. Among the various provisions of the law, the age at which individuals must begin taking RMDs from their retirement accounts increased from age 70½ to age 72. Therefore, if you turn 72 this year, you must begin taking RMDs from your tax-deferred retirement accounts, including IRAs and 401(k) and 403(b) plans. Going forward, the 72 RMD rule will apply to anyone born on July 1, 1949, or later. The amount withdrawn, which the IRS treats as taxable income, is determined by dividing the owner’s account balance at the end of the prior year by a factor based on his or her life expectancy.
Another significant change introduced by the SECURE Act is the general elimination of “stretch IRAs” and the new requirement that non-spouse beneficiaries of inherited qualified plans must now withdraw all assets in those accounts and pay the related tax liabilities within 10 years of the original account owner’s death. Previously, beneficiaries of decedent’s retirement plan accounts could allow those savings to continue to grow tax-free and “stretch out” taxable withdrawals over their lifetimes.
While RMDs may represent a significant portion of retirees’ annual income, not all seniors age 72 and older require those funds to pay basic living expenses and enjoy their golden years. In those circumstances, retirees should meet with their financial advisors to consider a broad range of lawful options for eliminating or taking less than the required minimum distributions from their accounts and subsequently leaving more money to their heirs.
For example, individuals may elect to convert a traditional IRA to a Roth IRA and eliminate RMDs altogether. Although the conversion itself is a taxable event for which account owners must pay income tax on the amount rolled over all at once, Roth IRAs are not subject to RMDs and any withdrawals taken in the future are tax-free. Moreover, if you hold the Roth account for at least five years, you will be able to leave your heirs with a substantial tax-free gift upon your passing.
Another option for retirees age 72 and older to satisfy their RMDs without incurring income tax is to transfer as much as $100,000 per year from an IRA directly to a qualifying nonprofit organization via a qualified charitable distribution (QCD). In addition, individuals age 72 and older can avoid taking RMDs when they continue to work for the companies that sponsor their 401(k) and IRA retirement plans. The RMDs will go into effect when the account owner actually stops working. With this in mind, individuals should recognize that the postponement of an RMD only applies to the retirement savings accounts sponsored by the employers with whom they continue to work; they will still be required to take RMDs from other retirement accounts sponsored by prior employers and not rolled over to newer plans.
Finally, retirees should recognize that because the SECURE Act removed age caps on IRA contributions, continuing to work past age 70½ allows them to continue earning income and saving money in tax-advantaged retirement accounts.
The professionals with Provenance Wealth Advisors (PWA) have deep experience helping high-net-worth individuals implement tax-efficient financial-planning strategies designed to meet wealth-accumulation and preservation goals.
About the Author: Robert Mark Weiss, CFA, is a regional director and financial planner with Provenance Wealth Advisors, an Independent Registered Investment Advisor affiliated with Berkowitz Pollack Brant Advisors + CPAs, and a registered representative with Raymond James Financial Services. For more information, call (941) 308-1126 or email Provenance Wealth Advisors (PWA), 515 E. Las Olas Blvd., Ft. Lauderdale, FL 33301 (954) 712-8888.
Securities offered through Raymond James Financial Services, Inc., Member FINRA/SIPC. Raymond James is not affiliated with and does not endorse the opinions or services of Berkowitz Pollack Brant Advisors + CPAs. PWA is not a registered broker/dealer and is independent of Raymond James Financial Services. Investment Advisory and Financial Planning Services are offered through Raymond James Financial Services Advisors, Inc., and Provenance Wealth Advisors, a Registered Investment Advisor.
This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of the advisors of PWA and not necessarily those of Raymond James. The information contained in this report does not purport to be a complete description of the developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Investments mentioned may not be suitable for all investors.
You should discuss any tax or legal matters with the appropriate professional. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Please note that changes in tax laws may occur at any time and may have a substantial impact on each person’s situation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters.
Unless certain criteria are met, Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals are permitted. Additionally, each converted amount may be subject to its own five-year holding period. Converting a traditional IRA into a Roth IRA has tax implications. Investors should consult a tax advisor before deciding to do a conversion.
Posted April 8, 2021