Three RMD Strategies to Deploy with IRA Savings

by Becky Vasquez - Thursday, 19 November, 2020

Individual retirement accounts are popular tax-friendly ways to build a retirement nest egg.

An important caveat exists, however. Namely, when you reach age 72, most traditional retirement account savers normally must start taking so-called required minimum distributions, or RMDs. (In 2020 due to the coronavirus pandemic, you've got the option to skip taking your annual RMD. But such a grace period is only being extended to this year. As it stands now, RMDs won't be optional in 2021 and going forward.)

As a result, if you've got any savings in a traditional IRA or an employer-sponsored retirement plan like a 401(k) or 403(b) plan, it's important to consider your options.

A bit of background: the precise amount is calculated by the IRS using an age-based formula. That total can be obtained through your IFA advisor or custodian such as Schwab or Fidelity.

It's important to note that Roth IRAs aren't normally subject to annual RMDs. Also, in certain situations savers in workplace retirement plans don't face such mandatory withdrawals.

But industry statistics show that a majority of IRA assets are held in traditional accounts. So, let's take a deeper look at three overarching strategies that can be applied to RMD withdrawals: 

Cash Withdrawal

In this strategy, you simply sell retirement account assets to raise the amount required. It's important to understand, though, that taxes aren't required to be withheld from that total. But you can ask for federal and state taxes to be held back at a specified percentage.

The proceeds from such an IRA withdrawal can be taken as a lump sum or received on a prorated basis, monthly or quarterly. We find that most of our clients prefer to be set-up to take these distributions directly into their checking accounts. (Taxes on RMDs are calculated at your ordinary income tax rate.) 

Qualified Charitable Contribution (QCD)   

This is an important consideration. The new tax reform act passed by Congress kicks in this year. A key provision is that the Qualified Charitable Distribution was made permanent.

That means any portion of the RMD up to $100,000 can be given this year to a qualified charity without being subject to taxes. If you are already giving to charity, this might be an excellent time to talk to your CPA about using a traditional IRA account instead of a taxable account.

Another point to remember: the custodians IFA uses to hold your assets (Schwab and Fidelity) will now provide check books for IRA accounts. Just let your advisor know if you would like check-writing privileges on your IRA account.

Transfer Shares

Some of our clients don't need additional IRA money to live on. As a result, they often choose to transfer the appropriate number of shares from a traditional IRA to their taxable account. If you choose to do this, you will still owe taxes on the RMD amount, but you won't have cash sitting in a savings account earning very little.

All RMDs must be taken by December 31st of each year to avoid a 50% penalty.

Before implementing any RMD withdrawal strategy, we encourage you to reach out to an IFA advisor and your personal tax expert. If nothing else, another set of objective eyes can help make sure you're executing a well-considered plan of attack. 

This is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, product or service. There are no guarantees investment strategies will be successful.  Investing involves risks, including possible loss of principal. This is intended to be informational in nature and should not be construed as tax advice. IFA Taxes is a division of Index Fund Advisors, Inc.