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RMDs Are Back: Here Is How To Soften the Tax Blow
Dan Newman

To provide some relief during the COVID-19 pandemic, the CARES Act suspended required minimum distributions (RMDs) from traditional IRAs and employer-sponsored retirement plans for 2020. No such relief is available in 2021. Therefore, many retirees will need to take taxable RMDs by the end of this year. Fortunately, a couple of strategies are available to help you soften the tax blow.

Reviewing the rules

If you have savings in a traditional IRA or employer-sponsored retirement plan, such as a 401(k) plan, you must take RMDs every year beginning at age 72 (70½ if you reached that age by December 31, 2019). If you were subject to RMD requirements before 2021, you will need to take an RMD by December 31, 2021. If you are turning 72 in 2021, you have until April 1, 2022, to take your first RMD. After that, you must take RMDs by the end of each year, beginning with December 31, 2022. There is proposed legislation to push the beginning age for RMDs to 75, but as of now age 72 is still the mark. 

RMDs must be taken on time. The penalty for missing one is 50% of the amount you should have withdrawn. That amount is calculated by taking your retirement account balance as of December 31 of the previous year and dividing it by your IRS-prescribed life expectancy as of December 31 of the current year. For example, if your account balance was $700,000 on December 31, 2020, and your life expectancy as of December 31, 2021, is 21.5 years, then this year’s RMD is $32,558.14 ($700,000/21.5). If assessed, the penalty for not taking this RMD could be $16,279.

Related Read: For Good Financial Health, Take Your RMDs

Strategies to consider

Unless you need the money for living expenses, try to minimize or defer RMDs as much as possible. Doing so reduces the impact on your tax bill and allows your savings to grow and compound on a tax-deferred basis as long as possible. You might be able to take advantage of one or more of the following strategies:

Take Your First RMD Early
If you are turning 72 this year, you have until April 1, 2022, to take your first RMD. But that means you will have two RMDs next year (April and December), which could push you into a higher tax bracket. Therefore, it may be preferable to take your first RMD in 2021, even though it will increase this year’s taxable income.

Name Your Spouse as Sole Beneficiary
If your spouse is more than ten years younger than you and is your sole beneficiary, you can use your joint life expectancies to calculate your RMD. This will increase the life expectancy factor and reduce the annual RMD amount.

Make a Qualified Charitable Distribution
If charitable donations are already part of your plan, consider donating a qualified charitable distribution (QCD) from a traditional IRA rather than other assets. This technique allows you to transfer up to $100,000 per year tax-free directly to a qualified charity and apply that amount toward your RMD. And, because the funds bypass your taxable income, it is the equivalent of a charitable deduction. But using a QCD is a more effective strategy if an ordinary charitable gift would not be fully deductible (for example, because you do not itemize) or if an RMD would trigger undesirable tax consequences.

Note: QCDs are not available for employer-sponsored plans, but it still may be possible to take advantage of this technique by rolling the funds into an IRA.

Related Read: How a Charitable Remainder Trust Can Work as a “Stretch IRA” Substitute

Invest in a Qualified Longevity Annuity Contract
You can fund a qualified longevity annuity contract (QLAC) with the lesser of 25% of your retirement account balance or $135,000 (in 2021). RMDs on those funds are deferred until the annuity payments begin (at age 85), reducing your RMDs at ages 72 through 85.

Continue Working
If you keep working (and you do not own 5% or more of the company that you work for), your employer-sponsored plan may permit you to defer RMDs until April 1 of the year following the year you retire. This option is available only for your current employer’s plan, not for previous employers’ plans or IRAs. However, some plans may allow you to roll over funds from those accounts and defer RMDs.

Have a plan

There is one piece of good news: Starting in 2022, the IRS will use new tables with longer life expectancy factors, which can have the effect of reducing RMDs. Even so, it is important to have a plan to ensure that you avoid tax penalties, minimize your tax costs and maximize the value of your retirement accounts. Now is a good time to discuss these issues with your ORBA financial or tax advisor.

Sidebar: So you are nearing retirement…

If you are only a few years away from retirement, now is an ideal time to consider several strategies for managing required minimum distributions (RMDs) down the road. One option is to start withdrawing retirement funds early (so long as you are older than 59½ and will not be penalized for doing so). Although this will accelerate some of your tax liability, it allows you to spread distributions over a longer period, potentially minimizing undesirable tax consequences. It also reduces your account balance, lowering your RMDs once you reach age 72. But look at current tax rates and compare them with what you expect in later years.

Another possibility is to convert a portion of your traditional IRA assets into a Roth IRA. Roth IRAs are not subject to RMDs and you are allowed to make tax-free withdrawals from them. If you transfer to a Roth, you will have to pay tax on the converted amounts upfront. But, you might be able to minimize taxes by converting the account gradually over several years.

For more information on required minimum distributions, contact Dan Newman at [email protected] or call him at 312.670.7444. Visit to learn more about our Wealth Management Services.

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