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Accounting and Tax Planning

A Primer on RMDs

By Bob Suprenant, CPA, MST

Bob Suprenant, CPA, MST

With all that’s happened in the world this year, the SECURE Act, signed into law on Dec. 20, 2019, seems to have been robbed of the celebration it deserves.

Let’s give it its due and weave our way through the 2020 rules for what are known as RMDs.

First, what is an RMD, or required minimum distribution? It’s the minimum amount you must take out of your retirement plan — 401(k), IRA, 403(b), etc. — once you reach a certain age. The theory is that the amount in your retirement plan will be liquidated as you age.

To calculate the RMD, as a general rule, you divide the balance in your account at the end of the previous year — for this year, it would be Dec. 31, 2019 — by the distribution period found in the Uniform Lifetime Table. These tables currently run through age 115. Seriously.

Who Must Take an RMD?

This is where we blow the party horns and throw the confetti. These rules changed on Dec. 20, 2019. If you reached age 70½ in 2019, you were required to take your first distribution by April 1, 2020. If you reach age 70½ in 2020, you are not required to take your first distribution until April 1, 2022.

At the risk of putting a wet blanket on the fun, if you do not take the full amount of your RMD and/or you do not take it by the applicable deadline, there is a penalty. The penalty is an additional tax of 50% of the deficiency. The additional tax can be waived if due to reasonable error and you take steps to remedy the shortfall.

Did COVID-19 Change This?

Yes, the CARES Act, which was signed into law on March 27, 2020, included provisions that waived the requirement for RMDs in 2020. This also happened in 2009 when the stock market crashed. In 2020, RMDs are not required. The RMD waiver also applies to inherited IRAs.

It keeps getting better. On June 23, 2020, the IRS released Notice 2020-51, which allows those who have taken an RMD in 2020, but wish they hadn’t, to return the money to the retirement plan by Aug. 31.

There is a bit of a catch here, though. Most who take RMDs have federal and state tax withholdings on their distributions. Under this relief, the entire distribution must be returned to the retirement plan, not the distribution net of taxes.

By way of example, if you have a gross RMD of $20,000 and there is $3,000 in federal and state withholding, your net distribution is $17,000. To have none of your RMD taxed, the $20,000 must be returned to the retirement plan by Aug. 31. If you return only $17,000, you will be taxed on a $3,000 distribution.

Do I Take an RMD In 2020?

I know I don’t need to take an RMD in 2020, but should I? The answer is … it depends. And you should consult your tax advisor. Ask this individual to run projections to see what the best amount is for you to take as a distribution. For married joint filers, the 12% federal tax bracket includes taxable income up to $79,000. For amounts over $79,000, the tax bracket is at least 22%, a full 10% increase.

For many of my clients, I try to take full advantage of the lower tax bracket and get their incomes as close to the $79,000 as possible. Other clients, who use their retirement-plan distributions to make their charitable contributions (a very wise idea as you will generally save state taxes in addition to possibly saving federal taxes), should probably take a retirement-plan distribution in 2020.

Those who are aged may also want to take a distribution. Under the inherited IRA rules, your IRA beneficiaries will be required to take distributions, so consider their tax rates compared with yours.

As always, in the tax code, there are exceptions to exceptions, and this brief summary is only the cocktail hour. Be aware that you are not required to take an RMD for 2020. If you have taken an RMD, you can return it by Aug. 31. Do some tax planning to determine the best amount for your 2020 retirement-plan distribution.

Bob Suprenant, CPA, MST is a director of Special Tax Services at MP CPAs in Springfield. His focus is working with closely held businesses and their owners and identifying and implementing sophisticated corporate and business tax-planning strategies.

Accounting and Tax Planning

This Measure Changes the Retirement Landscape in Several Ways

It’s called the Setting Every Community Up for Retirement Enhancement Act, and it was signed into law just a few weeks ago and took effect on Jan. 1. It is making an impact on taxpayers already, and individuals should know and understand its many provisions.

By Ian Coddington and Gabriel Jacobson

Signed into law Dec. 20, 2019, the SECURE Act, or Setting Every Community Up for Retirement Enhancement Act, has changed the retirement landscape for Americans retiring or planning to retire in the future.

The prominent components of the SECURE Act remove the maximum age for Traditional IRA contributions, increase the age for required minimum distributions, change how IRA benefits are received after death, and expand the types of expenses applicable to education savings funds. This law offsets some of the spending included in the budget bill by accelerating distribution of tax-deferred accounts.

Ian Coddington

Gabriel Jacobson

Due to the timing of this new legislation, there will be many questions from tax filers regarding the new rules and what changes apply to their plans. We hope this article will provide a starting point for understanding the changes that will impact us come tax time.

A Traditional IRA, or Traditional Individual Retirement Account, can be opened at most financial institutions.

Unless your income is above a certain threshold, every dollar of earned income from wages or self-employment contributed to the account by an individual reduces your annual taxable income dollar for dollar. This assumes you do not contribute above the annual limit into one or more tax-deferred retirement accounts.

Due to increasing life expectancy, the SECURE Act has eliminated the maximum age limit that an individual may contribute to a Traditional IRA. Prior to 2020, the maximum age was 70½.

The SECURE Act also raises the age that an individual with investments held in a Traditional IRA or other tax-deferred retirement account, such as a 401(k), must take distributions from 70½ to 72. These required minimum distributions, or RMDs, serve as the government’s way of collecting on tax-deferred income and are taxed at the individual’s income-tax rates, so no special investment-tax rates apply.

Each year, the distribution must equal a certain fraction of the year-end balance of an individual’s tax-deferred retirement account. The tax penalty for omitting all or a portion of your annual RMD is 50% of the amount of the RMD not withdrawn. The fraction is known as the life-expectancy factor and is based on the individual’s age.

The SECURE Act did not change the life-expectancy factors for 2020, but a change is expected for 2021. Unfortunately, RMDs for individuals who reached 70½ by Dec. 31, 2019 are not delayed. Such individuals must continue to take their RMDs under the same rules as prior to passage of the SECURE Act.

“With the SECURE Act going into effect Jan. 1, 2020, the law is making an impact on taxpayers now. The effects of this will continue over the next few years, as death benefits for beneficiaries and minimum distributions will not affect all retirees immediately.”

Individuals who inherit Traditional or Roth IRAs during or after Jan. 1, 2020 are now subject to a shorter time frame for RMDs pursuant to the SECURE Act. Prior to passage of the SECURE Act, individuals were able to withdraw funds from their IRAs over various schedules. The longest schedule was based on the beneficiary’s life expectancy and could last the majority of the individual’s life.

This allowed those who inherited Traditional IRAs to stretch the tax liabilities on those RMDs discussed previously over a longer period, reducing the annual tax burden. Under the current law, distributions to most non-spouse beneficiaries are required to be distributed within 10 years following the plan participant’s or IRA owner’s death (the 10-year rule). This may increase the size of RMD payments and push an individual to a higher tax bracket.

Exceptions to the 10-year rule are allowed for distributions to the following recipients: the surviving spouse, who receives the account value as if they were the owner of the IRA; an IRA owner’s child who has not yet reached majority; a chronically ill individual; and any other individual who is not more than 10 years younger than the IRA owner. Those beneficiaries who qualify under this exception may continue to take their distributions through the predefined life-expectancy rules.

Section 529 plans have also been expanded by the SECURE Act. These plans can be opened at most financial institutions and are established by a state or educational institution.

These 529 plans use post-tax contributions to generate tax-free earnings to pay for qualified educational expenses. As long as the distributions pay for these expenses, they will be tax-free. Qualified distributions include tuition, fees, books, and supplies. Previously, distributions were only tax-free if paid toward qualified education expenses for public and private institutions; now, they will include registered apprenticeships and repayment of certain student loans.

This will expand the qualified distributions to include equipment needed to complete apprenticeships and technical classes and training. For repayment of student loans, an individual is able to pay the principal or interest on qualified education loans of the beneficiary, up to $10,000. This can also include a sibling of the beneficiary, if the account holder has multiple children.

With the SECURE Act going into effect Jan. 1, 2020, the law is making an impact on taxpayers now. The effects of this will continue over the next few years, as death benefits for beneficiaries and minimum distributions will not affect all retirees immediately.

This article does not qualify as legal advice. Seek your tax professional or retirement advisor with additional questions on the impact this will have in your individual situation.

Ian Coddington and Gabriel Jacobson are associates with Holyoke-based public accounting firm Meyers Brothers Kalicka, P.C.; [email protected]; [email protected]