RMD **Reminder** and Effective Ways to Use Them

Posted on Tue, Nov 23, 2021 ©2021 Drucker & Scaccetti

Calendar-DeadlineBy: Brandon Caine, CPA, and Robert Polans, CPA, MT


As we approach the 2021 tax filing season, remember it is also Required Minimum Distribution (RMD) season. You generally have until December 31, 2021, to take your RMD out of tax-deferred retirement accounts to avoid costly penalties, unless this is your first RMD year, in which case you get a grace period until April 1, 2022. You generally do not have to take RMD’s from your employer’s plan until you terminate or retire. Individuals who inherited qualified plan accounts, including either traditional or ROTH accounts, must take their first RMD by December 31 of the year following the death of the original account owner. While many take RMDs as cash distributions with little thought to taxes, there are other effective ways to use your RMD, which we will discuss in today’s post along with a key reminder about 2021 RMDs.


Under the CARES Act, enacted in 2020 as a response to the COVID 19 pandemic, no 2020 RMDs were required. There were also guidelines provided by the IRS for returning some RMDs taken before or shortly after the CARES Act was enacted. Despite wishful thinking that this RMD suspension would continue into 2021, it has not. RMD requirements are fully in effect for 2021 and many still have RMD requirements to meet prior to December 31, 2021.


Under the SECURE Act, passed in December 2019, initial RMDs are now required for people who reached the age of 72 in 2021. Such RMDs are calculated based on the December 2020 account balances as adjusted for any outstanding rollovers. Prior to the SECURE Act, RMDs had to be taken prior to April 1 of the year following the year in which you reached age 70 ½. Additionally, RMDs had to be taken again by December 31 of that same year. There was also the opportunity of taking the first RMD by December 31 of the year in which you reached age 70 ½, so that the first RMD year did not include two distributions. Subsequent RMDs for people previously subject to the age 70 ½ RMD requirements must be taken no later than December 31st of each calendar year.


Effective Ways to Use your RMD:

There are two tax efficient ways to use an RMD that are worth consideration.


Option 1:

For taxpayers who are required to make estimated tax payments and are currently underpaid, the solution may be to significantly increase the withholding taxes from RMDs or voluntary non-RMD retirement distributions to retroactively catch up to mitigate or avoid underpayment of estimated tax penalties which amount to three percent per quarter in 2021.


Taxpayers can avoid underpayment penalties, by paying at least 90% of their current 2021 tax year liability or by using a “safe harbor” method by paying 100% or 110% of their 2020 tax liability instead. Use 100% if your adjusted gross income (AGI) is under $150,000 and 110% if you are over that threshold.


Estimated tax payments are deemed paid when you mail the payment or make a direct online payment to the IRS and, generally, must be paid on a quarter-by-quarter basis as you receive your income during the year. If you are using a safe harbor method, then you must pay the safe harbor amount evenly over four quarters by the estimated tax due date. Taxes withheld from your retirement distributions, however, are considered as paid evenly throughout the year, even when paid all at once via withholding very late in the tax year. A taxpayer can even elect to have withholding tax on 100% of their retirement distribution amounts to eliminate or reduce potential underpayment penalties.


Option 2:

Another tax-efficient way of using an RMD is by making a qualified charitable distribution (QCD). This option permits individuals who are age 70 ½ or older in 2021 to directly contribute up to $100,000 from any of their IRA accounts, including certain SEP IRA’s, instead of taking this QCD amount as part of their RMD. Even though the RMD age was increased to age 72 under the SECURE Act, the age for allowing direct contributions from retirement accounts remains the same (age 70 ½) as prior to the SECURE Act.


QCDs can be contributed to benefit multiple qualifying charities if the annual direct contribution does not exceed the $100,000 limit. While a taxpayer does not get the benefit of a charitable donation itemized deduction for the QCD, the QCD amount will not be included as taxable income and an RMD requirement can be partially or completely satisfied by the QCD. QCDs can be an effective tool because it lowers your AGI, which, in turn, could lower income taxes on Social Security or lower future Medicare premiums.


An added benefit is the QCD does not count as a charitable contribution for charitable limitation purposes which are based on AGI. As a result, a QCD can possibly benefit a donor who would otherwise be subject to such charitable donation limitations. A QCD can also be beneficial for taxpayers with an RMD requirement but who do not itemize their deductions. QCD rules can be complex, and they are not available to be made to donor advised funds, private foundations, and certain other organizations, so check with your tax advisor before considering this option.


If you donate utilizing a QCD, always make sure that the contribution goes directly from the IRA to the qualifying charity and tell your tax advisor, because the 1099R tax reporting may not always clearly indicate that a QCD was utilized.


What to do next?

The Tax Warriors at Drucker & Scaccetti are well equipped with decades of experience to help you with retirement distribution planning and other year-end tax planning needs. Please contact us with any of your retirement distribution planning questions.

Topics: retirement plan limits, RMDs, Required Minimum Distributions, retirement income, SECURE act, CARES Act

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