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Do You Have An RMD Strategy?

When you reach age 72, the tax laws require that you take annual payments from your IRAs and workplace retirement plans. These required minimum distributions, or RMDs, have drawn a lot of attention over the past few years, with changes – and suggested changes – to the rules. For example, the SECURE Act of 2019 increased the RMD starting age from 70½ to 72, while the CARES Act waived all RMDs for 2020. In 2021, legislators proposed increasing the RMD age up to 75, and exempting individuals with less than $100,000 in retirement savings from having to take RMDs. Legislators are also proposing to create a new RMD requirement for taxpayers who earn more than $450,000 per year (married, filing joint) and have $10 million or more in retirement savings accounts.  

But, for 2021, the rules are not changing. Although you must take your RMD if you are age 72 or older, you have options in how you satisfy the annual payout requirement. This blog reviews strategies you may want to consider for this year’s RMD. A subsequent blog will suggest more long-term strategies to reduce or eliminate RMDs.

 

RMD Rules

The RMD rules apply to tax-qualified retirement savings vehicles, including traditional IRAs and SEP and SIMPLE IRAs. The rules also apply to 401(k), 403(b) and governmental 457(b) plans, including those with Roth assets. Roth IRAs are not subject to RMDs during the IRA owner’s lifetime.

The first RMD must be taken for the year you turn 72. You may delay taking the first RMD until April 1 of following the year you reach age 72. After your first RMD year, RMDs must be taken by December 31 each year. If you fail to take an RMD, you will be subject to a 50% tax on the RMD not withdrawn.

The RMD amount is calculated by dividing the prior-year December 31 account balance by a life expectancy factor based on your age and an IRS life expectancy table. For example, a 73-year-old IRA owner who had a $400,000 IRA balance on December 31, 2020, would have a $16,194 RMD due by December 31, 2021, approximately 4% of the account balance. ($400,000 divided by 24.7, the life expectancy factor for a 73-year-old based on the Uniform Life Expectancy Table).

Key questions to ask


1. What is your tax liability?

Most RMDs are taxable distributions. Even if you have nondeductible or after-tax assets in your Traditional IRAs, you cannot withdraw just the after-tax assets. Each IRA distribution includes a pro rata combination of tax-deferred and after-tax assets if any of your non-Roth IRAs hold these types of assets. You must aggregate all Traditional, SEP and SIMPLE IRAs are to determine the percentage of a distribution that is after-tax.

If you turned 72 in 2021, you can delay taking your first RMD as late as April 1, 2022. But you may want to consider taking your 2021 RMD in 2021 anyway. If you wait until 2022 to take your first RMD, you will also have to take your 2022 RMD in 2022, saddling you with two distributions and a potentially higher tax liability in one tax year. Conversely, if you’re still working in 2021, but plan to retire in 2022, your tax bracket may be lower in 2022, in which case the double distribution won’t have as much of an effect on your tax liability.


2. What is your spouses age? 

If your spouse is the sole beneficiary of your IRA and is more than 10 years younger, you may use the IRS’s Joint Life and Last Survivor Expectancy Table to calculate your RMD, which will result in a larger divisor than using the Uniform Lifetime Table. For example, the life expectancy factor for a 73-year-old IRA owner married to a 60-year-old spouse is 26.8. This would reduce the RMD amount in our previous example from $16,194 to $14,925.


3. Is IRA aggregation an option? 

If you have multiple IRAs, an RMD must be calculated for each IRA separately. But once you have calculated the amounts due, you may withdraw the aggregated amount from any of your Traditional, SEP or SIMPLE IRAs. By taking the total amount from one (or more) IRAs, you can select which investments to liquidate across your various IRAs.

You cannot take workplace retirement plan RMDs from your IRAs. Each 401(k) plan, for example, must pay out its RMD each year.

 4. Are you are still working?

You may be able to delay RMDs while you’re still working. Some qualified retirement plans allow individuals who are still working for the plan sponsor to delay starting RMDs until after they retire, as long as they do not own more than 5% of the company. These rules do not apply to IRAs or IRA-based plans.

If you’re still working, you are also eligible to keep contributing to your IRA. For 2021, you can contribute up to $7,000 through April 15, 2022. Making annual contributions may be a way to offset the savings lost through RMDs each year and build up the liquid investments in your IRA.

5. Can you make a Qualified Charitable Distribution (QCD)?

IRA owners age 70½ and older may take a tax-free distribution of up to $100,000 per year if it is paid directly from their Traditional IRA to a qualifying charity. A QCD can satisfy your RMD for the year. This tax advantage is lost if you take receipt of the funds first, so be sure to instruct your IRA custodian to pay the distribution directly to the charity. Also, if you are still make tax-deductible contributions to your Traditional IRA, the amount you may exclude from taxable income as a QCD must be reduced by deductible contributions made after age 70½.  

Act now!

Requests to distribute an RMD in 2021 must be made to STRATA Trust in time to process the distribution by December 31, 2021. Before taking your 2021 RMD, however, you may want to talk to your tax or financial advisor to explore the RMD strategies that will best serve your immediate and future investment and retirement income objectives.

Use the quick links below to go to our form section, then click the ServiceNow icon next to the form you need to easily complete, sign and electronically submit your distribution request.

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