As you manage your investments and finances, you always have decisions to make, with some being more consequential than others. This year, depending on your age, you have an important choice – and one that you won’t likely have again.
Here’s some background: If you’re older than 72 (or 70 ½ if you were born before July 1,1949), you typically need to take annual withdrawals – technically called required minimum distributions, or RMDs – from your traditional IRA or 401(k). However, the requirement to take these distributions, which are taxable, was suspended for 2020, due to the coronavirus pandemic. You can still take distributions, of course – but should you?
There’s no one “correct” answer for everyone, so let’s look at both sides of the question.
You may want to take a distribution if…
…You need the money. If you need distributions to help meet your cost of living, you may have to take them, despite the tax implications. You might also consider taking a distribution this year to meet some of next year’s income needs if your income was lower than what you’re expecting in 2021, so that you could potentially benefit from a lower tax bracket.
…You’d like to make a large charitable contribution. In most years, you can move up to $100,000 from your traditional IRA to a qualified charity if you are 70-1/2 or older and offset part, or all, of your RMDs. This strategy, called a qualified charitable distribution, is less advantageous in a year without RMDs. It’s an option to consider if you’re still inclined to give to charity, but you might also consult with your tax professional to determine if it’s better to hold off until next year and just do a larger qualified charitable distribution then.
You might not want the distributions if…
…You don’t need the money. By not taking distributions this year, you could possibly lower your taxable income for 2020 and have more time for your accounts to grow on a tax-deferred basis. But keep in mind that RMDs are largely based on your IRA and 401(k) balances, so, by not taking the money this year, you could have to take a bigger RMD next year, if your accounts have grown. Also, you’ll be a year older, and your age does factor into the RMD formula – the older you are, the higher the percentage of your accounts you’ll have to withdraw annually.
…You want to give your accounts time to regain value. In 2020, we saw some wild swings in the financial markets. It’s possible you could end the year with flat or negative results in some of your retirement accounts, and, if so, you might not want to take a distribution, which could essentially mean selling investments within your IRA and 401(k) when their price is down. Remember, “selling low” is a mistake you’d like to avoid. However, there’s also no guarantee that your account values will go up in 2021.
As you can see, you’ll need to consider a variety of factors before deciding whether or not to take a distribution for this year. Get the help you need from a tax professional in making the right choice for you – it’s an opportunity that may not come again, so you’ll want to make the most of it.
This article was written by Edward Jones for use by:
William Busby, financial advisor
109 Westgate Dr., Suite C
Monticello, AR 71655
Edward Jones, its employees and financial advisors are not estate planners and cannot provide tax or legal advice. You should consult your estate-planning attorney or qualified tax advisor regarding your situation.