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Tag: IRA

RMD

RMDs are Back on Track for 2021

The year 2020 was one of the most eventful in recent times, and the changes to the rules that govern retirement accounts were no exception. One of those changes was the waiver of required minimum distributions (RMDs) for 2020. As a result of the waiver, you were not required to take RMDs from your IRA for 2020. But if you are of RMD age in 2021, you must resume RMDs for 2021 and continue for every year after. RMDs were waived for beneficiary IRAs as well and will need to resume in 2021 for certain beneficiaries. 

Reminder: RMDs do not apply to Roth IRA owners.  

RMDs- A Mild Refresher An RMD is a minimum amount that you must distribute (or withdraw) from your retirement account for any RMD year. You can always distribute more if you want to; however, a distribution of less than your RMD amount will result in you owing the IRS an excess accumulation penalty of 50% of the RMD shortfall. For example, if your RMD for 2021 is $20,000 and your 2021 IRA distributions total only $12,000, you will owe the IRS an excess accumulation penalty of $4,000 [($20,000 – $12,000) x 50%]. If you are required to take an RMD for 2021, your IRA custodian will send you an RMD notice by January 31, 2021. This will include your calculated RMD amount or an offer to calculate the amount upon request. This requirement does not apply to Beneficiary IRAs. 

New RMD Age- A Reminder:  The Setting Every Community Up for Retirement Enhancement (SECURE) Act, a new law passed in 2019, increased the RMD beginning age for IRA owners from age 70 ½ to age 72. As a result of this change, any IRA owner who reached age 70 ½ by December 31, 2019 – those born June 30, 1949, or earlier – must begin taking RMDs for the year he or she reaches age 70 ½ and continue for every year thereafter (except for 2020- where RMDs are waived). IRA owners who reach age 70 ½ after December 31, 2019, must begin RMDs for the year they reach age 72. 

Who Must Take RMDs for 2021 Whether you must take an RMD from your IRA for 2021 depends on factors that include whether it is your own IRA and your age in 2021, or if it is a beneficiary IRA, and if so, when the IRA was inherited. 

RMDs for Your own IRAs For 2021, For 2021, you must take an RMD from your own (non-beneficiary) IRA if you were 70 ½ or older on December 31, 2019, as you would have already started your RMDs and are required to continue. You would also be required to take an RMD for 2021 if you were born at any time in 1949 or earlier, as this means that you would be at least age 72 on December 31, 2021.  If you were born in 1950 and after, you would not be subject to RMDs for 2021 because you would not have reached age 70 ½ by December 31, 2019 and you would be under age 72 as of December 31, 2021.

RMDs For Your Beneficiary IRAs – Including Beneficiary Roth IRAs 

For beneficiary IRAs, whether you must take an RMD for 2021 depends on several factors, which starts with when you inherited the IRA. 

  1. If you inherited the IRA before 2020: If you inherited the IRA before 2020- including a Roth IRA, you must take an RMD for 2021 if: 
  • Your beneficiary IRA must be distributed within five years (the 5-year rule), and the IRA was inherited in 2015. This is because 2020 was not counted due to the RMD waiver, making 2021 year 5 of the 5-year period. 
  1. 2016 
  1. 2017 
  1. 2018 
  1. 2019 
  1. 2021 

Under the 5-year rule, distributions are optional until the end of the 5th year that follows the year the IRA owner died, at which time the entire account must be distributed.  

  • Your distributions are taken under the life-expectancy rule. Under this option, you must take a beneficiary RMD for every year that follows the year in which the IRA owner died (except for 2020).  

Please note: If you are the surviving spouse of the IRA owner, exceptions could apply. For example, if the IRA owner would have reached age 70 ½ after 2021, you would not need to start RMDs until the year your spouse would have reached age 70 ½. Also, the owner rules above would apply if the spouse beneficiary elects to move the assets to his or her own IRA. 

  1. If you inherited the IRA in 2020: If you inherited the IRA in 2020- including a Roth IRA, you must take an RMD for 2021 if you are an eligible designated beneficiary, and you are taking distributions over your life expectancy. You are an eligible designated beneficiary if:
  1. You are the surviving spouse of the IRA owner. But, the owner rules above apply if you elect to treat the IRA as your own, instead of electing the beneficiary IRA option. 
  1. You are disabled 
  1. You are chronically ill 
  1. You are a minor, as defined under state law 
  1. You are none of the above, but you are not more than 10-years younger than the IRA owner.  

In other cases, distributions for 2021 are optional.  

Spouse beneficiary caveat: If you are the surviving spouse of the IRA owner and you elect to keep the funds in a beneficiary IRA, you would not need to take RMDs for 2021, if your spouse would reach age 72 in a later year. 

Professional Assistance Helps To Avoid Penalties  

The rules explained above are complicated and professional assistance is often needed to ensure that any caveats are properly applied, thus avoiding the risk of IRS penalties. For instance, consider that your IRA custodian is permitted to make assumptions that could cause your RMD calculations to be incorrect. Therefore, even though your IRA custodian will calculate RMDs for your IRAs, it is still practical to have a professional review those calculations. 

Additionally, you might need to take RMDs from accounts under employer plans such as 401(k) and 403(b) plans. If you have assets under an employer plan, contact the plan administrator or your HR department regarding their RMD policies to determine if they will automatically distribute your RMDs or if you are required to submit RMD instructions. If you plan to roll over amounts from these accounts, contact us for help with ensuring that RMD amounts are not included in any rollover.  

Please do not hesitate to contact us with questions about this and any other matters related to your IRAs and employer plan accounts.  To learn more about CapSouth Wealth Management, visit our website at www.capsouthwm.com

CapSouth Partners, Inc., dba CapSouth Wealth Management, is an independent registered Investment Advisory firm.  CapSouth does not offer tax, accounting or legal advice. Consult your tax or legal advisors for all issues that may have tax or legal consequences.

Social Security

Social Security: The $64,000 Question

One of the most common questions people ask about Social Security is when they should start taking benefits.

This is the $64,000 question. Making the right decision for you can have a meaningful impact on your financial income in retirement.

Before considering how personal circumstances and objectives may play into your decision, it may be helpful to preface that discussion with an illustration of how benefits may differ based upon the age at which you commence taking Social Security.

As the accompanying chart reflects, the amount you receive will be based upon the age at which you begin taking benefits.

Monthly Benefit Amounts
Based on the Age that Benefits Begin¹

AgeBenefit Amount
62
63
64
65
66 and 4 months
67
68
69
70		$953
$1,018
$1,097
$1,184
$1,300
$1,369
$1,473
$1,577
$1,681

*This example assumes a benefit amount of $1,300 at the full retirement age of 66 and 4 months.

At first blush, the decision may seem a bit clear-cut: Simply calculate the lifetime value of the early benefit amount versus the lifetime value of the higher benefit, based on some assumed life expectancy.

The calculus is a bit more complicated than that because of the more favorable tax treatment of Social Security income versus IRA withdrawals, spousal benefit coordination opportunities, the consideration of the surviving spouse, and Social Security’s lifetime income guarantee that exists under current law.²

Here are three ideas to think about when making your decision:

  1. Do You Need the Money?
    Retiring before full retirement age may be a personal choice or one that is thrust upon you because of circumstances, such as declining health or job loss. If you need the income that Social Security is scheduled to provide, however reduced, then taking benefits early may be the only choice for you.
  2. Consider the Needs of Your Spouse
    If your spouse expects to depend on your Social Security income, the survivor benefits he or she receives after your death may be reduced substantially if you begin taking benefits early. It’s important to remember that, based on current life expectancy tables, women are likely to live longer than men.
  3. Are You Healthy?
    The primary risk in retirement is running out of money. The odds of living a long life in retirement calls for waiting until you reach full retirement age, so that you receive a full benefit for as long as you live. However, if your current health is poor, then starting earlier may make sense for you.

There are several elements you should evaluate before you start claiming Social Security. By determining your priorities and other income opportunities, you may be able to better decide at what age benefits make the most sense.

  1. Social Security Administration, 2018
  2. Withdrawals from traditional IRAs are taxed as ordinary income and, if taken before age 59½, may be subject to a 10% federal income tax penalty. Generally, once you reach age 70½, you must begin taking required minimum distributions.

To learn more about CapSouth Wealth Management and the services we provide, visit out website at www.capsouthwm.com

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG, LLC, is not affiliated with CapSouth Wealth Management. The opinions expressed and material provided are for general information and should not be considered a solicitation for the purchase or sale of any security. Copyright 2020 FMG Suite.

CapSouth Partners, Inc., dba CapSouth Wealth Management, is an independent registered Investment Advisory firm.  CapSouth does not offer tax, accounting or legal advice. Consult your tax or legal advisors for all issues that may have tax or legal consequences.

Roth Conversion – A valuable tool to consider before year-end

By:  Scott Fain

This year has been a challenge for many, and though we are certainly not out of the woods yet with the Coronavirus, the election, and other factors, many are glad to see the end of 2020 coming soon.  During these times, planning must go on.  As we move into the fourth quarter, it is a good time to evaluate the potential for Roth conversions before year-end.  

Roth conversions allow you to convert funds currently held in tax-deferred traditional IRAs to Roth IRAs, which then grow tax free.  Currently there is an income limitation and an annual maximum for direct contributions to a Roth IRA, but there are no limits on Roth conversions.  The process of converting the IRA to a Roth IRA involves recognizing the amount of the conversion as income in the current year.  Though an important tool to consider every year, 2020 offers particular opportunities.

Roth Conversion Considerations in 2020:

  1. Annual Required Minimum Distributions (RMDs) have been waived this year.  Roth conversions could be processed in the amount of the otherwise planned income from the waived RMDs.
  2. Various industries have seen lost wages and unemployment during 2020 due to the Coronavirus.  During this unfortunate time that many people have lower income, Roth conversions can be considered to take advantage of the lower tax bracket for the year.
  3. The current tax rates are set to sunset in 2025, unless Congress acts to change that.  Given the stimulus package this year along with other factors, there is certainly reason to expect that Congress will allow those rates to return to pre-2018 levels.  Roth conversions could be utilized to lock in today’s tax rates.

Other Considerations:

  1. Bracket Conversions – A common approach is to look at your current marginal tax bracket and your expected income to identify the amount of room allowable for additional income in that bracket.  For example, a married filing jointly couple with $250,000 in taxable income in 2020 could convert up to $76,600 and remain in the 24% tax bracket.  This can be evaluated each year to fully utilize the current tax bracket, without pushing into the next bracket.  Note – it is important to consider the impact on Medicare premiums, taxability of Social Security, and the trigger of the 3.8% net investment income surtax.
  2. Secure Act – As a result of The Secure Act enacted in January of this year, most non-spouse beneficiaries of IRAs will be required to distribute the funds out of the accounts within ten years.  Prior to the Act, most of those non-spouse beneficiaries would have been able to distribute the balance over their lifetimes.  This change can have a significant impact on the taxation of the income, as the distributions over a shorter period will often push the beneficiaries into higher tax brackets.  Consideration should be given to utilizing the account owner’s tax bracket through Roth conversions to transfer that balance to tax free accounts for the beneficiaries.
  3. Tax Surprises – An important part of retirement income planning often involves leveling out income.  It is often overlooked that, in addition to the impact on marginal tax brackets, spikes in income can cause increases in Medicare premiums and the taxability of Social Security benefits.  For a married couple, these increases can be further magnified by the death of the first spouse to die.  The change from the married filing jointly tax rate schedule to the single schedule can cause the rates to increase more rapidly at lower breakpoints.  Utilizing systematic Roth conversions, particularly prior to the start of RMDs, can be an effective tool to level income.
  4. Open the Door for Backdoor Roth Contributions – Roth conversions can be utilized to “zero out” existing IRA balances to allow for back door Roth contributions.  As mentioned previously, there are income limitations and annual maximums for direct contributions to Roth IRAs.  However, the backdoor Roth Contribution can be an effective strategy for higher income individuals wanting to contribute to their Roth IRAs.  This involves contributing after-tax dollars as a non-deductible contribution to your traditional IRA, and then immediately converting those funds to your Roth IRA.  Again, the income limitations do not apply to the conversions.  This strategy works best when a client has no current IRA balance.  Otherwise, the conversion is considered to be proportional across all IRA dollars and will cause taxation and cost basis tracking going forward.  The initial conversion of the IRAs to Roth IRAs simplifies the process.
  5. Leave Room for Charity – Clients who are charitable should take into consideration their future charitable intentions.  Portions of IRAs planned for qualified charitable distributions (QCDs) should NOT be converted to Roth IRAs.

It is important to note that there is no one-size-fits-all investment strategy, retirement plan, or Roth conversion recommendation.  Decisions can often have unintended consequences that should be considered.  If you have questions or want to know if a Roth conversion would be a good fit for you, please discuss the concept with your financial and tax advisors.

www.CapSouthWM.com

Investment advisory services offered through CapSouth Partners, Inc., d/b/a CapSouth Wealth Management, an independent Registered Investment Advisory firm.  CapSouth does not offer tax or legal advice.  Please consult your tax or legal advisor before making decisions that may have tax or legal consequences. This article is of a general nature only and should not be construed as individual advice.

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