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The recently passed CARES Act allows you to skip your Required Minimum Distributions (RMDs) from all retirement accounts this year. These distributions, required for retirement account owners over age 72 (increased from age 70½ by the SECURE Act), are taxed as income, so forgoing your 2020 distribution is a chance to lower your taxes. The waiver is an effort to give account balances a chance to recover in the wake of the coronavirus-related market decline.

So, you can skip this year’s RMD, but this leaves an important question – should you? The answer, like many financial questions, is…it depends. With this in mind, here are a few suggestions.

Are you taking income from your portfolio to support your living expenses?
If so, you should likely continue your current path, but if you usually have to take out a little more at the end of the year because your monthly distributions don’t meet the RMD requirement, you can skip that catch-up distribution for this year.

If this doesn’t apply to you, you could consider skipping this year’s distribution to lower your tax bill and leave more in your portfolio. However, if this is you, consider how these funds will ultimately be passed on to your heirs, as you’ll see in the next “legacy strategy” category.

Are these distributions part of a legacy strategy?
If so, you’ll likely want to stay the course and take your distribution. IRAs and 401ks are among the worst assets to pass to the next generation because of their high income taxes. So, if you’re strategically repositioning these accounts by using the RMDs to fund more tax efficient tools for transferring wealth (non-IRA portfolios, trusts, life insurance), you’ll benefit from the downturn because you’re able to move a higher percentage of your taxable assets without increasing your tax bill.

What if I have an Inherited IRA?
If you inherited your IRA before January 1, 2020, you can skip the 2020 RMD. If you inherited an IRA after January 1, 2020, changes made by the SECURE Act simply require you to fully distribute the account over 10 years instead of a specified annual withdrawal. Up to this point, the IRS has not added a year to the 10 year timeline so, unless we get that guidance, assume the 10 year limit applies.

Additionally, if you pass away during this 10 year period, your beneficiary will have to distribute and pay income tax on the entire account in one year. With the new rules, inherited IRAs are clearly not intended to be held for the long run. So, while skipping this year’s withdrawal may help the portfolio, make sure you consider the long-term plan with this strategy.

Don’t forget your tax bracket!
It’s easy to forget that we enjoy historically low tax rates right now and no one knows how long those will last. For example, a married couple filing jointly pays a mere 12% up to a $80,250 income, and then 22% bracket up to $171,050. It may make sense to continue withdraws from your IRAs to take advantage of these low tax rates. With a little advance planning, you can manage to stay in these lower brackets while still enjoying a high level of retirement income.

Your goals, income needs, living expenses, tax bracket and long term plans should all be considered when deciding if you should skip this year’s RMD – yet another reminder of why having a unified financial plan is so important to making wise financial decisions. So, while hearing “it depends” from advisors over and over may get old, it’s the right answer to this question. We hope this helps point you in the right direction!

Alterra Advisors - Josh Whelan

Grant Monson

CFP®, CLU®, ChFC®
Partner, Financial Advisor

About the Author

Grant grew up on a working wheat farm in eastern Washington. Today, he credits his family – who still manage the farm – for preparing him to build a business serving others. His vision to lead Alterra is built on relentless dedication to the success of his clients and the team – his extended family.

Grant’s dad says that he hasn’t worked a day in his life because “it isn’t work when you love what you are doing.” When combined with his mom’s view that “helping others should be part of every day”, Grant’s view of financial planning comes into focus. Alterra Advisors is very much a reflection of Monson family values.

Grant earned a bachelor’s degree in business and a master’s in economics at Washington State University. He launched his own financial advising practice over a decade ago, an entrepreneurial quest has become one of the most impactful things in Grant’s life. He loves coordinating the complex financial lives of business owners, bringing a depth of understanding that is rooted in his family’s own experience.

The “Alterra” name was coined by joining the Latin roots “alter”, the origin of the word “altruism” with “terra” meaning earth or land. This name reflects the company philosophy of “clients before profits” and providing firmly grounded advice.