“How you invest during retirement is as critical as how you invest in preparing for retirement," ----
- Daniel R. Solin, author, "7. Steps to Save Your Financial Life."
BY JULIA ANDERSON
The big virus crisis stimulus bill passed by the U.S. Senate and now headed to the House and the President, suspends for the rest of 2020 the requirement that seniors over 70 1/2 take RMD (Required Minimum Distribution) withdrawals from their tax-deferred savings accounts.
We said this was a possibility a few days ago in our most recent post here at sixtyandsingle.com but suggested it might not happen until later this year. Now, Congress is charging ahead.
RMD withdrawals are determined as a percentage of your nest egg such as a Rollover IRA at the end of the prior calendar year. In 2020, retirees were required to take RMD withdrawals from their tax-deferred nest egg based on the value of their funds on Dec. 31, 2019 before the big market crash.
Now, this year’s withdrawal requirement has been suspended. This is long-term help for seniors already worried that they might run out of money before they die.
Tax law requires RMDs to begin the year you turn 71/2, (now 72 with the recent change).
RMD money, by the way, is taxed as ordinary income on your federal income tax return.
The suspension is good news for two reasons:
1. Seniors can avoid taking taxable money out of their retirement savings when their investments have likely been hit by the 30 percent market downturn. The money stays and helps reinvest in the expected recovery over the long-term.
2. The RMD suspension lowers seniors’ taxable income in 2020. We will be getting out their calculators to see how much less they can withdraw but still pay their basic household bills. Or we may choose to live without RMD income all together. Either way our taxable income in 2020 will be lower. That’s good news going into 2021 when we pay estimated taxes based on 2020 income.
For those not yet over age 70, the IRS uses a life-expectancy actuarial chart to calculate percentage withdrawals for you that increase each year. For example:
If you are 72 this year and had $500,000 in your retirement tax-deferred nest egg on Dec. 31, 2019, the required withdrawal amount would have been $19,531 or $1,627 a month. Next year, the withdrawal amount would increase to $20,565, ($1,713 per month) assuming that the value of our nest egg increased from earnings by 5.5 percent.
If you are 72 this year and had $1,000,000 in your retirement tax deferred nest egg on Dec. 31, 2019, the IRS required that you withdraw $39,062 from that account this year. That’s $3,255 a month. Under normal circumstances, next year, the withdrawal amount would have increased to $41,131, if your remaining balance went up in value thanks to earnings by an estimated 5.5 percent.
All that is on hold thanks to the suspension. Take it or leave it, it’s up to you.
IRS RMD basics: click here
IRS RMD worksheet: click here
Nerdwallet.com click here
Kiplinger.com "Everything you need to know about RMDs." click here.
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