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Return your RMD | Financial Planning Solutions, LLC FINANCIAL PLANNING

If you have made a required minimum distribution (RMD) each year, this year is different. RMDs have been suspended. But what if you have already taken your RMD for 2020?

RMDs apply to pension plan holders who are 70½ years old or older (or who will be 72 years old after June 30, 1949). Since the money never paid tax on these input tax accounts, RMDs ensure that the IRS always gets their money.

While most retirees need some or all of the RMD to make a living, some don’t. The flexibility to skip a payout this year could be attractive to some people with other sources of income. Since RMDs are treated as taxable income, avoiding the distribution usually lowers taxable income and taxes due.

I have already taken my RMD

Some pensioners already took their RMD in early 2020. June 23approx The IRS issued a notice that an RMD can be reset. Prior to this announcement, the conditions for the provision were more limited and in some cases unclear.

The “Reset” option applies to RMDs from traditional IRAs and 401 (k) s as well as from other qualified pre-tax pension accounts, including beneficiary (inherited) IRAs.

Since taxes are usually withheld on RMDs, taxpayers have two options to reset the money:

  1. Reset the distribution plus tax paid and wait for the withholding tax to be refunded next April or
  2. Just reset the distribution and convert the account to a Roth.

Here’s an example:

Taken RMD of $ 37,000

Tax paid from $ 11,100

Received a check for $ 25,900

Option 1 – The taxpayer must have additional funds to repay the full amount.

RMD of $ 37,000 = $ 25,900 received; $ 11,100 tax paid

RMD repaid $ 37,000

Additional tax refund of $ 11,100 next year

Option 2 – The Roth conversion can drive the taxpayer into a higher tax bracket[1]

RMD of $ 37,000 = $ 25,900 received; $ 11,100 tax paid

RMD repaid $ 25,900

Converted amount in Roth $ 25,900 (Note: The conversion must be completed by August 31, 2018.)

Additional Tax Refund $ 0 ($ 11,100 tax paid will count towards the Roth conversion tax cost)

What am I doing?

If you want to pay back all the money, you need to come up with the extra money that has already been withheld and sent to the government. If you do not have the money, you can return what you have, turn it into a Roth, and let the government keep the tax payments.

Note that this repayment option only applies to 2020 RMDs.

As with all tax strategies, please contact your tax advisor before implementing any of these options.

If you have any questions about repaying your RMD, call us. We are here to help.

Lyman H. Jackson

[email protected]

617-653-3303

Financial Planning Solutions, LLC (FPS) is a registered investment advisor. FPS only makes this blog available for information and educational purposes. Nothing in this blog should be considered investment, tax, or legal advice. FPS only advises each customer after the conclusion of a consulting relationship. The information contained herein includes opinions and forward-looking statements that may not apply. Information comes from sources that are considered reliable. The information is at a specific time and is subject to change without notice. Such information may not be verified independently of FPS. Please note the link to important information at the end of this page.


[1] Roth conversions have a number of special rules and requirements. To ensure that you are doing a proper Roth conversion, please contact us or your accountant first to ensure that you are doing it correctly.

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