RMD planning for 2021 and beyond

What would you like to know

  • There are a number of strategies that can reduce or delay your customer’s RMD.
  • These strategies should be evaluated in the context of your client’s overall financial planning situation.
  • Their tax situation and whether or not they need the RMD money are key factors to consider.

As the end of 2021 approaches, it is important to ensure that all clients have received all of their Minimum Required Distributions (RMDs) for the year. As you probably know, there is a 50% penalty on any RMD amount not withdrawn by the deadline.

Beyond just managing RMDs, there are a number of planning issues around RMD not only for clients who need to take them, but also for younger clients as they approach age 72. .

Much of this planning focuses on:

  • Your client’s current and future tax brackets and income.
  • If your client needs the RMD money.

For many clients, steps can be taken this year and in the years ahead to reduce their RMD obligations from traditional IRAs and other retirement accounts, if that makes sense from an overall planning perspective.

Qualified Charitable Distributions (QCD)

Qualifying charitable distributions or QCDs allow those who are at least 70 and a half years old to withdraw up to $ 100,000 from their traditional IRA and refer them to qualified charities.

The advantage is that QCDs are not taxed. Regarding RMD planning:

  • QCDs taken before age 72 will reduce the amount of traditional IRA that is subject to future RMDs.
  • QCDs withdrawn beyond the amount of a customer’s RMD from age 72 will be used to reduce the amount of future RMD.
  • Using QCD for some or all of a client’s RMD will reduce the amount of RMD that is taxable, while still meeting the client’s charitable donation goals.

QCDs are a great tool for those who are eligible and inclined to charity. For clients in this situation who cannot itemize deductions, QCDs can be a tax-efficient method of making charitable donations while minimizing the tax burden on their RMD.

Roth conversions

Roth IRAs and Roth conversions have been in the news lately. A Roth IRA Conversion can be a strong overall planning tool, including as a vehicle to manage and reduce future MSY.

Money converted to a Roth IRA, along with future earnings on that money, is withdrawn from the pool of funds subject to RMD in future years. If a client is already taking their RMD, all RMD must still be taken in the current year; making a Roth conversion does not reduce any part of their RMD obligation in the year of the conversion.

The decision of whether or not a Roth conversion is right for your client should be made in the context of their overall financial planning goals. Considerations include:

  • Income and taxes for the current year. Years when your client’s income is lower than normal can be good years to consider a Roth conversion. This may include the period after the client has retired but has not yet started collecting Social Security benefits. Clients in this “slack” often find themselves in a lower tax bracket than in other years.
  • Are there any potential heirs other than the spouse to their IRA? If so, a Roth conversion can save those heirs on potential taxes after inherit the IRA. The analysis should look at the family’s overall tax situation to see if it makes sense for your client to prepay taxes for the next generation.
  • Does your client need the RMD money on the traditional IRA? Otherwise, paying taxes now in exchange for the ability to allow the converted Roth funds to continue to grow tax-free could be a good compromise.

Roth contributions

Contribute to a Roth IRA or Roth 401 (k) can be a way for clients to limit future RMDs. Contributions to a Roth 401 (k) can be particularly useful here, as there is no income limit on their ability to contribute and the contribution limits are higher than for a Roth IRA.

Money held in a Roth IRA is not subject to RMD. Money in a Roth 401 (k) is subject to RMD, although they are not taxed. This can be avoided by carrying the Roth 401 (k) account balance over to a Roth IRA when you leave that employer.

The money in a Roth IRA is not only RMD-exempt for the account holder, but also for their spouse if they inherit the Roth IRA. In addition, Roth IRA money inherited by beneficiaries other than the spouse will not be taxed if certain conditions are met.

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