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Tag: Taxes in Retirement

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.

Unknown Tax Liability on Your Retirement Accounts

Unknown Tax Liability on Your Retirement Accounts

By J. Scott Fain

July, 2018

You’ve worked most of your life to accumulate assets in various forms, likely to some extent in Individual Retirement Accounts (IRA’s). The government has allowed you to defer income into these accounts and to delay paying taxes on them until a later date…the date the funds are withdrawn to fund your retirement or beginning at age 70½ when your required minimum distributions (RMDs) begin.

The upside is you have been able to use those tax dollars to generate growth for yourself and to defer the withdrawals and payment of taxes until you are potentially in a lower tax bracket. On the other hand, this creates some unknowns: what tax rates will be at the time of the withdrawals and what your tax bracket will be…so essentially there is an unknown tax liability on your account.

Some clients have substantial assets and may never need to access the funds other than as directed for RMDs. Other clients rely on these funds for retirement and often do not realize ahead of time the impact of having to withdraw not only the amount of funds they need for living expenses, but also the funds to pay the taxes on those withdrawals.

Further, clients often do not consider that the tax burden on their retirement accounts follows the accounts to the beneficiary and will be paid at the respective beneficiary’s tax bracket and rate.

What are some planning opportunities regarding these taxes on your retirement accounts?

Roth Conversions – Many times parents are in a lower tax bracket during retirement than that of their children.  Further, Georgia provides a Retirement Income Exclusion for taxpayers beginning at age 62, so Georgia retirees often do not pay state income taxes.  Parents with excess assets should consider Roth conversions to allow for payment of taxes now at their tax rates and to provide their children with Roth IRAs growing tax free.

Qualified Charitable Distributions (QCDs) – Many people write checks directly to charities, not knowing there are more efficient methods available.  One of these methods is through Qualified Charitable Distributions (QCDs).  QCDs allow you to make distributions from your IRA(s) directly to your charity of choice, never having to report the funds as taxable income to you.  In many cases, this provides a greater benefit to you than writing a check for a donation directly to the charity and then taking a deduction on your taxes.  By not counting the IRA distribution as income, you may reduce the amount of your Social Security benefits that are taxable, and you may reduce your Medicare premium, as both of these amounts are based on your amount of income.  As a bonus, QCDs count towards satisfying your Required Minimum Distributions (RMDs) which begin at age 70½.

You must have attained age 70½ to be eligible, and QCDs are limited to $100,000 per taxpayer, per year. The distributions can be done on demand or may be setup as recurring on a monthly or quarterly basis.  The distributions generally come in the form of a check made payable to the charity and are mailed to the client’s home address.  It is very important to coordinate with your advisor and your tax preparer to make sure these distributions are reported correctly.

Life Insurance – Another way to address taxes on retirement accounts is through life insurance.  Utilizing a permanent life insurance policy, such as Guaranteed Universal Life (GUL), on the individual or on a joint-life basis allows one to leverage a portion of his or her assets to provide a death benefit to pay the taxes on the account.  It is important to note that the death benefit comes in tax-free.  By utilizing a GUL policy, which is designed to provide the largest death benefit for the lowest premium, on a guaranteed basis, we can forecast the internal rate of return on the policy for a given date of death – i.e. the rate that you would have had to earn on the invested premium dollars to end with the amount of the death benefit on that date.  Assuming good health and insurability, these are generally favorable rates of return. (See also my article on Life Insurance as an Asset Class).  This option can be a good utilization of excess funds from RMDs as well.

Estate Planning – A simple, yet often overlooked, planning opportunity involves charitable bequests.  When selecting assets to leave to various individuals or charities, consider leaving your retirement accounts to charities and other assets to your children or other individuals.  Again, the tax burden on the retirement accounts follows them – whether to your children or to other beneficiaries.  Most other assets will receive a step-up in basis at your death to fair market value, thus they will have no tax burden.  Since non-profit 501(c)(3) organizations do not pay taxes, it is more efficient to leave them your IRAs and to leave your children your investment accounts, real estate, life insurance, etc.  Remember: Beneficiary designations supersede your Last Will & Testament.  Be sure to review your beneficiary designations on your IRAs, life insurance policies, and 401k accounts, and to review any Transfer on Death (TOD) designations, etc. in context of your desired estate plan.

Utilize the Roth Option – As an alternative to deferring taxes into retirement, the Roth IRA allows individuals to contribute funds into the Roth IRA account on an after-tax basis, meaning that you pay the taxes on the income now at your current tax bracket and rate and then defer use of the funds until retirement (after 59½ ).  Under this option, the funds grow tax free going forward until withdrawn.  If necessary, you can withdraw your contributions (not the growth) prior to age 59½ without penalty.  Many 401k plans now offer a Roth option for deferrals.

In summary, there are several planning opportunities that exist and should be considered regarding your retirement accounts and the unknown amount of taxes that will be due and payable by someone at some time.  Contact CapSouth for more information on these concepts and how they might apply to your particular situation.

800-929-1001

CapSouthWM.com

***This article is not intended as specific advice or recommendation. All decisions should be reviewed and considered in the context of your individual situation.  Please contact us for more information on how this information may be utilized under your circumstances.  CapSouth Partners, Inc., dba CapSouth Wealth Management, is an independent Registered Investment Advisor.  CapSouth does not provide tax or legal advice.  Please consult your tax or legal advisor before making decisions that may have tax or legal consequences.***

 

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