CARES Act Carries Required Minimum Distribution Relief! Should You Take Your RMD?

One of the many provisions in The CARE Act gave IRA (Qualified) account owners the option to NOT take Required Minimum Distributions (RMD) in 2020. IRS rules normally require owners of qualified accounts to withdraw RMDs every year starting at 70.5.  The RMD is calculated by dividing the account balance at year end by the IRS Life Expectancy factor. The Life expectancy factor is better understood as a percentage instead of a divisor.  At 70.5, the life expectancy factor is 3.7% and increases each year. For example, if the account balance was $100,000 x 3.7% IRS Life Expectancy percent equals an thee RMD of $3,700.    
 
The CARES ACT gives account owners the option of taking their RMD in 2020, or not.  Account owners that need the RMD to meet living expenses will take the money.  Account owners that don’t need RMD  to meet basic living expenses can decide whether to take it, or leave it,  Most account owners I’ve talked to that don’t need the RMD to live, are inclined not to take the RMD opting to reduce taxable income and taxes. On first impression, the decision to not take the RMD makes sense, but when you consider our marginal tax brackets and that future taxes could potentially be higher than today, it may not be the best decision! 
 
The Tax Cuts and Jobs Act that lowered taxes expire in 2025 resulting in increasing tax rates. Our tax system uses marginal tax brackets where different bands of income are taxed at different, specific percentages. The higher income brackets are taxed at a higher percent.  Should the current law expire, you have an opportunity to pay lower taxes on income today at a lower tax rate than you will in a few years.   
 
If the account owner had taxable income landing in the middle of the income bracket, wouldn’t it make sense to “fill up” the bracket, or recognize enough into to reach the top of the bracket? Leaving money in the IRA, could mean a risk with higher taxation in the future at higher marginal tax rates. 
 
A married couple will pay a marginal tax rate of 12% on income between $20,000 to $80,000.  If their income is $60,000, wouldn’t it make sense to fill up the 12% marginal tax bracket by recognizing $20,000 additional income?   A married couple filing a joint return the marginal tax rate is 22% between $80,000 and $171,000.  If your taxable income is $150,000, wouldn’t it make sense to withdraw another $21,000 to fill up the 22% marginal tax bracket?
 
Have you decided whether to take your RMD this year or leave it in?  Do you know what your marginal tax bracket is? Do you have an idea of where your income falls in the bracket of income that applies to your situation?  Consult with a financial or tax advisor to determine what the best decision might be for you.  If you want a second opinion on your specific situation, go to our website www.scottandassociatesoftexas.com , click on the “Contact Us” section and provide your information, or question and we will reply to you.  You can also email me at [email protected] with your information and I will reply to you.
 
This information has been provided by a Licensed Insurance Professional and does not necessarily represent the views of the presenting insurance professional.  The statements and opinions expressed are those of the author and are subject to change at any time.  This material has been prepared for informational and educational purposes only.  It is not intended to provide, and should not be relied upon for, accounting, legal, tax or investment advice. All information is believed to be from reliable sources; however, presenting insurance professional makes no representation as to its completeness or accuracy.
 
The information contained herein is based on our understanding of current tax law. The tax and legislative information may be subject to change and different interpretations. We recommend that you seek professional legal advice for applicability to your personal situation.