For Some, RMD Deadline Is Fast Approaching
Q: Do I need to take a Required Minimum Distribution from my IRA this year?
A: Yes, while the CARES Act passed last year allowed those past their required beginning date (basically, the year after turning 72) to skip Required Minimum Distributions (RMDs) in 2020, those that qualify need to take an RMD in 2021. If you have taken RMDs in the past, or turned 72 in 2020, you are required to take an RMD prior to December 31, 2021. As there have been significant changes in tax laws the last two years pertaining to IRAs and RMDs, consider seeking advice specific to your situation from a tax professional or wealth advisor. Remember, there are tax consequences any time you take a distribution from your IRA since those distributions are considered ordinary income by the IRS.
Q: Am I required to take a Required Minimum Distribution? Would it ever make sense to leave it in my account?
A: You may be shocked to learn that RMDs are, in fact, required by the IRS. Once you’ve passed your required beginning date, the penalty for failing to take that distribution in a given year is 50% of the RMD amount. So, if you needed to take a $100,000 distribution and didn’t pull out any funds from your IRA for that year, you would conceivably owe the IRS $50,000 in penalties alone. With that high of a penalty, there is no instance when it would make sense not to take your RMD. If for some reason you forget to take your full RMD, you may be able to have the penalty waived provided you can show that a reasonable error occurred, and steps are being taken to remedy the situation. In that situation, a tax professional could help you navigate the process.
Q: Are there any considerations I should make regarding my RMD?
A: Since RMDs are considered taxable income, you may want to consider how that taxable event will impact your total tax bill for the calendar year. You could consider a Qualified Charitable Distribution (QCD) to a charity of your choice to help circumvent taxes on a RMD. In doing so, you’re basically taking pre-tax dollars from your IRA and sending them directly to your preferred charity, thereby circumventing any tax liability to you on the amount distributed. There are some important logistics to consider in making a QCD that are worth contacting your tax professional or wealth advisor about, but it’s much more tax efficient to make that QCD rather than simply donating cash.
Internal Revenue Service
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