Making Gold from the New RMD Rules
“He who has the gold makes the rules.” -Wizard of Id
“He who knows the rules makes gold.” -Norris, Perné & French
American wit has transformed the Golden Rule into numerous variations on the theme of “gold and rules”. You and I don’t get to write the rules, perhaps because we haven’t got enough gold. Despite this handicap, we believe that knowing the rules and how they affect you reveals opportunities to make the rules work in your favor.
Simply stated, “He who knows the rules makes gold.”
In the midst of the coronavirus chaos that has affected the markets and our daily lives, laws affecting you and your retirement accounts have changed. The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was signed into law in March 2020. Nestled within the 880 pages of the CARES Act were provisions that change how you are required to take income from your retirement accounts.
Let’s ask three questions: (1) How have the rules changed? (2) Are the changes good for you? (3) Most importantly, what is your plan to make the new rules work in your favor?
First, how have the rules changed?
**The most important change for most retirees is that Required Minimum Distributions (RMDs) have been eliminated for 2020, including RMDs from inherited IRAs.**
RMDs require you to make withdrawals from your retirement accounts after you turn 72. Presumably, you’ll pay taxes on those withdrawals. The theory is that you get deductions for retirement savings while you’re working, and in exchange, you’ll pay taxes on those savings when you retire. For most people, this is a good deal. Their income is higher while they are working than it is in retirement, so they end up saving money on taxes under this arrangement.
However, there is a catch. As the word “required” implies, RMDs aren’t optional: the law requires you to take these distributions from your retirement accounts each year. Because the CARES Act eliminated RMDs for 2020, retirees now have options for whether to take income from their retirement accounts, or not. If you do take income, you have more options about what to do with it.
This brings us to our second question: are the changes good for you?
In this case, the changes are definitely good for you. If you need income from your retirement accounts, you can still take it. If you don’t need the income and would rather let your account recover from the market downturn, you can do that also.
You can also still make Qualified Charitable Distributions (QCDs) and Roth conversions from your retirement accounts this year. The CARES Act didn’t take away any of your options this year: in fact, it opened up new possibilities for how to make the rules work in your favor!
The most important question for you to consider is our third question: What is your plan to make the new rules work in your favor?
Should you take income from your retirement accounts? This definitely makes sense if you need the income and you don’t have any other accounts available to support you. Even if you don’t need regular income, this might still make sense if you’re planning on some large-ticket spending in the coming years. You’d be able to spread out your withdrawals over multiple years to keep your income in a lower tax bracket.
For families with large retirement savings, there are even more options. The opportunity for Roth conversions this year is excellent, because you don’t have to take your RMD first, then convert. You can convert as much or as little to a Roth as makes sense for your situation. With the market falling to low levels, you also have the advantage of converting to a Roth at an advantageous time. If you convert while the market is relatively low, you’ll have the opportunity to watch the market recovery to take place tax-free in a Roth account, instead of a traditional IRA or 401k.
QCDs are still an option this year, so families that have used the opportunity to give directly to charity from their retirement accounts can still do so, up to $100,000. QCDs are not included in taxable income, and they also aren’t included when calculating your Medicare Part B and Part D premiums. These are valuable benefits for families that know how to use the rules to their advantage, especially during these times where the desire to be charitable can increase.
With all the options that are available this year, it can seem overwhelming to try to chart a course of action that makes the most sense for you, not just for this year, but over the long term as well. Norris, Perné & French can help! We have a team of experts ready to show you how the rules work, and to develop a plan that makes the rules work for you. We have been helping families in Grand Rapids, West Michigan, and throughout the country with their investments and planning since 1933.
Please feel free to send us a message or give us a call anytime. We are grateful for your trust and confidence in this highly uncertain time, and we hope to be able to help you turn this situation to your advantage!
Norris, Perné & French