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Amid a great deal of uncertainty in 2020 due to the ongoing coronavirus pandemic, we find ourselves once again navigating uncertain waters as it relates to tax planning for tax year 2021. While the CARES Act waived the requirement to take required minimum distributions (RMDs) in 2020, those provisions have lapsed and RMDs are back in play for 2021.
Retirement accounts, including IRAs and qualified plans such as 401(k)s, are subject to the required minimum distribution rules as laid out in the tax code. Account owners must begin taking RMDs upon turning age 72 thanks to the SECURE Act passed in late 2019 (or age 70½ if you reached the beginning age before 2020). Additionally, owners of inherited IRAs are subject to a whole new set of complicated rules under the SECURE Act and may still have an annual RMD requirement if they do not fall under the new 10-year payout structure.
Here are some valuable tips to keep in mind when planning for RMDs in 2021:
Keep an Eye on the Horizon for Legislative Changes
While there has been little talk of further COVID-related legislative relief for RMDs in 2021, the potential still exists. If you do not want or need your RMD in 2021, it might behoove you to wait a while before taking your 2021 RMD. And although the CARES Act included provisions allowing RMD funds already taken to be rolled back into retirement accounts in 2020, it is not certain that this special relief would be granted again in 2021. An indirect rollover can also create confusion for taxpayers and their tax preparers. If you can wait to take your RMD, you may want to.
Decide Which Account to Pull From
The IRS allows account owners with multiple IRA accounts to pull their RMDs from one, or all, of their IRA accounts. Choosing the account with the worst performance or lowest transaction fees might be your best bet. Be sure to weigh all of your options and talk with your team of advisors before taking your RMDs for 2021 if you own more than one IRA account. For 401(k)s and qualified plans, however, each RMD must be taken out of the account in which it belongs.
Consider Charitable Giving
If you are charitably-inclined and over age 70 ½, you can give up to $100,000 per year to charity directly out of your IRA, with zero tax consequences, under the qualified charitable distribution (QCD) rules. The distribution out of your IRA is reportable but not taxable on your tax return, and no deduction is taken for the donation. This tax treatment is especially helpful for those taxpayers who do not itemize deductions.
QCD distributions can also satisfy your RMD requirements for the year, without being included in (or increasing!) your Adjusted Gross Income (AGI) figure, which has potential side-effects on Medicare premiums and other items tied to AGI.
Given the ongoing uncertainty of the coronavirus pandemic, potential changes in tax law, and market fluctuations, it is now more important than ever before to plan diligently for your retirement accounts and related tax consequences. Be sure to discuss these important matters with your Central Trust Company team of advisors, along with your tax preparer and attorney.