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Should You Take Your 2020 RMD Anyway?

By Rick Imhoff, CFP ®

The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) signed into law on March 27, 2020, suspended the requirement to take your annual required minimum distribution (RMD) from your 401(k), 403(b), Traditional IRA, or Inherited IRA.  This would allow you to keep your money in the plan or account to grow tax deferred for another year.  It would also reduce your taxable income and likely reduce your overall income tax liability for 2020.  However, there are a couple of reasons you may still want to take a withdrawal in 2020.

If you anticipate being in a higher tax bracket next year, or in the future, it may be beneficial to make a withdrawal in 2020, especially if you are in the 10% or 12% tax bracket.  The next bracket after 12% is 22% which is a significant jump.  For every $1,000 of taxable income at 22% versus 12%, you would pay an additional $100 in income tax.  At $10,000, that would be an additional $1,000.  

If you have not reached the top end of your 12% tax bracket, you may consider filling it out to help save money if your tax rate is higher in the future.  Of course, if your tax bracket will likely be the same or lower in the future, then it might be a good idea to not make a withdrawal this year.  Since the RMD is suspended for 2020, you can of course ignore the RMD amount and take whatever amount you want if you need or choose to make a withdrawal.  

Even though the 2020 RMD is suspended, you can still make a Qualified Charitable Distribution (QCD) from your Traditional IRA if you are at least age 70 ½.  This would be any distribution made directly from your Traditional IRA to a qualified charitable organization not to exceed $100,000 in a tax year.  In years when an RMD is required, any QCD you make can count towards your RMD.

Any QCD you make from your Traditional IRA will not be taxable to you.  Because of this, you will not be able to take a charitable deduction on your tax return.  During these challenging times, charitable and religious organizations may be hurting and could use money to fulfill their mission.  Unfortunately, small business owners, like local restaurants and retail stores, and those who work there, may also need assistance during this time, but direct payments from your Traditional IRA to them do not qualify for a QCD.

However, there are charitable and religious organizations who, as part of their regular mission or who have created special funds, provide help to these types of small businesses and individuals.  This could be a food pantry, funds to help pay rent or utility bills, school supplies, etc.  You could make a QCD to the charitable or religious organization that would meet the criteria of a qualified charity and they in turn could provide funds to these individuals.     

Prior to making any decision regarding distributions from your plan or account in 2020, you should consult with your tax advisor to see how your current and future individual income tax situation may be to maximize the amount you keep after Uncle Sam takes his share.