With people living longer and benefiting from the long-running
bull market, there are more factors to consider in taking required minimum
distributions (RMDs) from retirement accounts. The traditional IRA, SEP IRA and
401(k) plans offer tax deductions on contributions and tax-deferred growth on
earnings during the accumulation phase, but eventually the government wants you
to pay taxes on that money.
Be aware that the IRS has proposed a new update to the life
expectancy tables used to calculate annual RMDs for the first time since 2002.
The proposed changes, which are not expected to go into effect until 2021,
would likely reduce the RMD amount for many retirees, based on today’s longer
Some retirees who have saved and invested well may find they
do not need these distributions for their day-to-day expenses. Therefore, it’s
a good idea to have a strategy for where to allocate these funds based on your
longer-term goals, such as plans for beneficiaries, charitable giving or to
have them available for medical or caregiving expenses down the road. Please
give us a call if you’d like to discuss strategies for your RMDs moving
How you handle RMDs can be especially important for your
spouse. You may want to consider reinvesting a portion of your withdrawals for
growth opportunity if there is a significant age difference between you and
In late December, President Donald Trump signed into law the
Setting Every Community Up for Retirement Enhancement (SECURE) Act. Among its many
provisions is the ability for retirees to delay taking RMDs until age 72 (up
from the current age of 70½). Be aware that this change applies only to people
who turn 70½ after Dec. 31, 2019.2
Once you begin taking RMDs, please know that you have
options; you don’t just have to convert long-time investments into cash.
Strategic alternatives include:3
- Making a
qualified charitable donation (up to $100,000 a year) directly from your IRA to
- Paying taxes on
the RMD and then putting those funds into a Roth IRA, which continues to grow
tax-free and can be inherited free of inheritance tax. There are also no RMDs
for a Roth. Note that you must be eligible for a Roth based on your income.
- Contributing the
funds to a grandchild’s education via a 529 college savings plan, where
earnings are tax-free as long as they’re used for qualified education expenses
(you may even be able to deduct contributions on your state tax return).
Another option is to reposition assets before RMDs kick in
to purchase a qualified longevity annuity contract (QLAC). This strategy allows
you to defer your RMDs until you need the income (up to age 85), at which point
you can receive guaranteed monthly payments for the rest of your life. The IRS
limits the total contribution to 25 percent of the assets in the IRA, up to a
maximum of $130,000.4
Content prepared by Kara Stefan
1 Jeffrey Levine. Nerd’s Eye View. Nov. 13, 2019. “IRS
Proposes New RMD Life Expectancy Tables To Begin In 2021.” https://www.kitces.com/blog/irs-proposes-new-rmd-life-expectancy-tables-to-begin-in-2021/. Accessed Jan. 3, 2019.
2 Stephen Miller. Society for Human Resource Management.
Dec. 20, 2019. “SECURE Act Alters 401(k) Compliance Landscape.” https://www.shrm.org/ResourcesAndTools/hr-topics/benefits/Pages/SECURE-Act-alters-401k-compliance-landscape.aspx. Accessed Jan. 3, 2019.
3 RBC Wealth Management. “Five strategies for taking
your required minimum distributions.” https://www.rbcwealthmanagement.com/us/en/research-insights/five-strategies-for-taking-your-required-minimum-distributions/detail/?utm_id=wm1552523589020191. Accessed Jan. 3, 2019.
Neither the firm nor its agents or representatives may give tax advice.
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