Your Financial Future: Understanding required minimum distributions
This week we are going to discuss income taxes concerning required minimum distributions.
Last year during the pandemic, the CARES Act was passed to deal with the economic destruction going on because of the virus. One of the provisions made taking required minimum distributions (RMDs) optional in 2020. In some ways, this seemed inconsistent with many of the goals of pumping money into the economy to stimulate growth.
I believe the reason this was offered was to allow time for stock market recovery. We had a very unusual, V-shaped crash where the market went down about 30% one month and then recovered most of the loss the next month. This is not a normal market behavior.
In 2021, people are now required to resume required minimum distributions or face a 50% penalty. Anyone that was born in 1949 or before and will be 72 by Dec. 31, 2021 must withdraw their funds according to the rules. This rule applies only to qualified money such as 401(k)s, and IRAs. The amount that must be taken out depends on your age. The SECURE Act which became law on Jan. 1, 2020 changed the age when RMDs start to 72. Before that, they started at age 70陆.
People who had inherited or stretched IRAs were not required last year to take RMDs either. Before The SECURE Act, this was a fantastic way to leave unneeded money to children or grandchildren. While they were required to take distribution from the stretch, it was based on the beneficiaries鈥� age. A 10-year-old might have to withdrawal 1% while the underlining investment was earning 5%. This was a powerful legacy-building strategy. People who died before Dec. 31, 2019 and left a stretch were grandfathered in under the old rule.
People who inherited an IRA in 2020 are required to take distribution this year also. However, the new law requires that all of the funds must be taken out of the account before the end of 10 years from the date of death. This makes them pay taxes at the time of withdrawal. So, if you are leaving money to your adult children, they may be receiving this during their prime earning years. The inherited IRA could put them in a high tax bracket.
The SECURE Act also applies to Roth IRAs. The account still must be liquidated within 10 years. However, it would be beneficial if cash flow allowed it to take all of the funds out on the 364th day of year 10. This way you could obtain maximum tax-free growth for the beneficiary. You would not do in most cases for a taxable IRA. These rules do not apply to spousal beneficiaries. They are the only ones who can make a spouse蘑菇视频 IRA theirs.
Spouses are the only beneficiary that can make someone else蘑菇视频 their own. If they are under age 59陆, they usually should not make this change. This is because if you take money out of your IRA before age 59陆, you will be accessed a 10% penalty. By keeping it in the name of your husband or wife, you can avoid this penalty. Once you reach this age, you can then change it to your own name.
We will discuss some other tax changes in a future column. Remember this planning is very important, because it is not just how much you earn that is important, it蘑菇视频 how much you get to keep.
Your Financial Future is written by certified financial planner Gary W. Boatman, MBA and CFP, who also wrote the book, 鈥淵our Financial Compass: Safe Passage Through The Turbulent Waters of Taxes, Income Planning and Market Volatility.鈥� If there is an area that you would like to see discussed in the column, send your suggestions to gary@BoatmanWealthManagement.com.