TRUST & ESTATE PLANNING

Should You Skip Your 2020 Required Minimum Distributions?

06.24.2020 - Bryan Kirk

When the CARES Act was passed in March, it suspended the required minimum distribution (RMD) rules for certain retirement plans, including 401(k) accounts, 403(b) accounts and IRAs, for 2020.

This means that if you have been taking RMDs, or if you are required to take distributions starting this year because you turn 72, you can forgo the distribution this year.

This week the IRS issued additional guidance, clarifying that anyone who has already taken their RMD this year can roll those funds back into their accounts, as long as they do so before August 31, 2020.

Who Does the Waiver of 2020 RMDs Benefit?

Prior to 2020, an IRA participant was required to take minimum distributions (RMDs) from their IRAs beginning April 1 of the year after the year they attained age 70 ½. Effective in 2020, the triggering age switched to 72. 

If you were required to take RMDs in previous years or are turning 72 this year, the RMD waiver for 2020 may benefit you. 

How Should You Think about Forgoing Your 2020 RMD?

The best way to think about forgoing your 2020 RMD is as additional savings. The RMD requirements are designed to force you to withdraw and pay tax on a portion of your IRA each year. With the waiver, you don’t need to do that in 2020. 

Your investments don’t need to be sold. You don’t need to deplete your account. You also don’t need to pay tax. 

You can maintain your IRA’s status quo and save this year’s RMD in your account. Yet there is a downside. Like all forms of savings, you don’t have the funds to spend. 

How Do You Evaluate the Tax Savings?

Of course, the difference between normal savings and skipping your 2020 RMD is taxes.

For example, if your 2020 RMD is $100,000 and your effective tax rate is 40%, the net amount to your pocket after tax is only $60,000. If you don’t take the RMD, you keep $100,000 in your account. 

That tax difference can seem substantial. But it’s important to remember that the $100,000 you keep in your account remains subject to tax when you eventually withdraw it. And that applies to any additional earnings on the $100,000 as well. 

The real benefit is the growth on the $40,000 you would have paid in taxes. And that pre-tax growth still must be adjusted for taxes. 

The following charts show examples of the difference between taking a 2020 RMD, or not, based on a $3 million IRA. The example participant is a 75-year-old taxpayer with an effective tax rate of 40% and RMDs paid out for each year after 2020 in both scenarios. 

 

Take 2020 RMD = Total Net Distributions of $2,235,950 and Ending Value of $1,698,498

Forgo 2020 RMD = Total Net Distributions of $2,256,059 and Ending Value of $1,779,378

*These projections are for illustrative purposes only.  In both scenarios, the projection is based on Fiduciary Trust’s capital market expectations and an asset allocation of 37% Taxable Bonds, 30% US Large Cap, 10% US Mid Cap, 5% US Small Cap, 10% International Large Cap, and 8% Hedge Funds. 


The two charts appear similar. But there are two differences when skipping the 2020 RMD:

  • The total net distributions from the IRA over the 20-year period is over $20,000 greater. This results from the account value being greater at the end of 2020. 
  • The ending value is also over $80,000 greater. This represents an over $48,000 benefit after taxes, if the IRA beneficiaries are also at a 40% effective tax rate. 

In sum, forgoing the 2020 RMD in this example yields a roughly $68,000 benefit over the 20-year period.

That’s better than a stick in the eye. If you don’t need your RMD for 2020, seize the benefit. But if you rely your RMD, careful consideration is necessary.   




This communication is intended solely to provide general information. The information and opinions stated may change without notice. The information and opinions do not represent a complete analysis of every material fact regarding any market, industry, sector or security. Statements of fact have been obtained from sources deemed reliable, but no representation is made as to their completeness or accuracy. The opinions expressed are not intended as individual investment, tax or estate planning advice or as a recommendation of any particular security, strategy or investment product. Please consult your personal advisor to determine whether this information may be appropriate for you. This information is provided solely for insight into our general management philosophy and process. Historical performance does not guarantee future results and results may differ over future time periods.

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