NO RMD in 2020 – Little Known Benefit

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Among the good and bad provisions of the massive Coronavirus Aid, Relief, and Economic Security Act or CARES Act, are waivers for your 2020 required minimum distributions (RMD). Many people don’t need this money for day to day expenses, but they have to take it anyhow. 

Who Does This Apply To?

If you have to take a RMD in 2020 from any plan. for example a 401(k) or your IRA the new law says you no longer have to take it in 2020. Also included are beneficiaries, and including those who turned age 70 1/2 in 2019 and had to take their first RMD by April 1, 2020.

Benefits and An Interesting Strategy:

  1. As we all know our 2020 RMDs were sky high. Our 2020 RMDs were based on our retirement account values on December 31, 2019, when the Dow was over 28,000, now it is around 22,000. 
  2. When you take your RMD you pay income tax on it at the ordinary income rate and it increases the amount of your Social Security that is taxable and it can roll you into a higher tax bracket for dividends and capital gains. You get NO special tax treatment for RMD.
  3. STRATEGY – since you don’t have to take an RMD, you could decide to take advantage of this situation to do a ROTH conversion. First of all, any amount converted removes those funds from your IRA, lowering the balance that will be subject to your future RMD, therefore lowers your income and tax bill for future years. Secondly, once the funds are in your Roth IRA, they will become lifetime tax free. Your Roth will also pass income tax-free to your beneficiaries. Most importantly, converting now when market values have dropped will mean that any future rebound will now accumulate tax free to you in your Roth IRA. Which is better, price appreciation of a stock in an IRA or a ROTH? ROTH!!!!!!
  4. Yes, a ROTH conversion is taxable as ordinary income, just like a RMD! However, today we may be paying mush lower taxes that we will be in future years as we pay for all of this new government spending.

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