By Adam Bruno, Certified Financial Fiduciary®
There really is a purpose behind required minimum distributions (RMD) of tax-advantaged retirement accounts. IRAs and employer-sponsored retirement plans feature tax-deferred income contributions and earnings growth throughout the lifetime of the account. There’s just one catch — when you take money out of that account, it then gets taxed at ordinary income tax rates. Some retirees use that money to pay for their expenses, but others may not need it and would rather let it continue growing, untaxed, and then leave it to heirs.
That means that retirees who need the money are taxed and those who don’t could avoid the tax. Those tax revenues are used to fund government programs, but we are fortunate to have decades of a tax reprieve so gains can accumulate faster.
Retirement investing, and RMDs in particular, can be rather confusing. But just because something is difficult — and ever changing — doesn’t mean we shouldn’t take advantage of the options available. Quite the opposite — tax-deferred investing is a way to optimize the accumulation of wealth, so it’s worth the time and effort to understand how these accounts work.
You can tap the advice of a financial professional to help you manage your retirement accounts, even those that fall under an employer plan. After all, your employer isn’t going to help you manage the rest of your portfolio, so feel free to call us if you have questions about your tax-advantaged accounts and their distribution options.
In 2019, Congress passed the Setting Every Community Up for Retirement Enhancement (SECURE) Act, with several changes regarding RMDs. Prior to the legislation, retirement account owners had to start RMDs at age 70½; the law increased that age to 72 for anyone born after June 30, 1949. Those with a traditional IRA must take their first RMD by April 1 of the year after which they turn age 72, even if they haven’t retired yet. Each year thereafter, they must take an RMD by Dec. 31. Investors with multiple IRAs must calculate the appropriate RMD for each one, but they can take that total amount from just one of the accounts they own. That’s easier to do with traditional IRAs than with multiple prior employer retirement accounts, which require contacting former employers to calculate and send the distributions.1
There is a penalty for not taking the appropriate RMD: The account owner must pay a 50% excise tax on the amount not distributed each year. Also note that you cannot withdraw a couple’s total RMD from just one spouse’s account or a different type of qualified account.2
The rules for an inherited IRA can be confusing, and they also changed with the recent SECURE Act. Specifically, it is now prohibited for a non-spouse IRA beneficiary to “stretch” out taxable distributions throughout his life expectancy. Starting in January 2020, the named beneficiary is required to withdraw all funds within 10 years of inheriting the account. However, unlike before, the heir can wait the full 10 years before taking distributions, meaning there are no RMDs each year.3
The inherited IRA rules didn’t change for a spouse who inherits a wife’s or husband’s IRA upon death. She also has more options for withdrawals, such as the ability to designate herself as the new account owner, roll it over to her existing IRA or take distributions as a beneficiary.
Be aware that these distribution rules do not apply to a Roth IRA, either directly owned or inherited. Since the Roth is funded with already-taxed income, withdrawals are tax-free in retirement — even the gains accrued over time. The only caveat is that the owner (or original owner, if inherited) must have owned the account for at least five years (the clock starts on Jan. 1 of the year of the first contribution). Contributions withdrawn before that five-year holding period may be taken tax free, but any withdrawn interest is taxable.4
Annuities also benefit from tax-deferred growth, but the account owner takes RMDs only if it is classified as a qualified annuity, meaning that it was funded with pre-tax money. Non-qualified annuity contracts are funded with after-tax income and feature tax-deferred earnings, so they do not mandate RMDs and are taxed upon distribution.5
If you have questions, please call my office at (239) 771-8696 and schedule your confidential visit with me.
For more information go to taxfreefortmyers.com to see my upcoming webinar schedule.
Evolution Retirement Services
12500 Brantley Commons Court, Suite 3
Fort Myers, FL 33907
(239) 771-8696
www.evolutionretirementservices.com
info@evolutionretirementservices.com
Content prepared by Kara Stefan Communications.
1 Judith Ward. T. Rowe Price. May 11, 2021. “Five Important Things
You Should Know About RMDs.” https://www.troweprice.com/
personal-investing/resources/insights/five-things-you-should-
know-about-rmds.html. Accessed May 21, 2021.
2 Denise Appleby. Investopedia. April 21, 2020. “Required
Minimum Distributions: Avoid These 4 Mistakes.”
https://www.investopedia.com/articles/retirement/04/
120604.asp. Accessed May 21, 2021.
3 Fidelity. June 1, 2020. “SECURE Act rewrites the rules on stretch
IRAs.” https://www.fidelity.com/learning-center/personal-
finance/retirement/secure-act-inherited-iras. Accessed May 21,
2021.
4 Barbara Weltman. Investopedia. Feb. 15, 2021. “The Rules on
RMDs for Inherited IRA Beneficiaries.”
https://www.investopedia.com/articles/personal-finance/102815/
rules-rmds-ira-beneficiaries.asp. Accessed May 21, 2021.
5 FINRA. 2021. “Required Minimum Distributions—Common
Questions About IRA Accounts.” https://www.finra.org/
investors/learn-to-invest/types-investments/retirement/
rmds-questions-about-ira-accounts. Accessed May 21, 2021.
Evolution Disclosure:
Investment advisory services are offered through Evolution Wealth Management Inc., an investment advisor registered with the State of Florida. Registration does not imply any level of skill or training. Evolution Wealth Management’s unique CRD number is 307644. You can obtain a copy of Evolution Wealth Management’s firm brochure (Form ADV Part 2A) free of charge by visiting https://adviserinfo.sec.gov/firm/summary/307644. Evolution Wealth Management offers investment advisory services only where it is appropriately registered or exempt from registration and only after clients have entered into an investment advisory agreement confirming the terms of engagement and have been provided a copy of the firm’s ADV Part 2A. Insurance services provided by Evolution Retirement Services. Any guarantees mentioned are backed by the financial strength and claims-paying ability of the issuing insurance company and may be subject to restrictions, limitations, or early withdrawal fees, which vary by the issuer. They do not refer, in any way to securities or investment advisory products. You should consider the charges, risks, expenses, and investment objectives carefully before entering a contract. This material has been prepared for informational purposes only and should not be construed as a solicitation to effect, or attempt to effect, either transactions in securities or the rendering of personalized investment advice. This material is not intended to provide, and should not be relied on for tax, legal, accounting, or other financial advice. Evolution Wealth Management and Evolution Retirement Services do not provide tax, legal or accounting advice. You should consult your own tax, legal, and accounting advisors before engaging in any transaction. Evolution Wealth Management and Evolution Retirement Services are affiliated entities.