8 strategies to optimize RMD from IRAs

RMDs are a simple concept that got complicated after Congress and the IRS finished making their rules. But these rules also create opportunities.

The Minimum Required Distributions (RMDs) of traditional IRAs and other qualified retirement plans are not suspended in 2021 as they were in 2020. If you must take RMD, you can also consider some options and strategies that will maximize the return. after tax income and make the process easier for you.

Here is the simple part. The owner of a qualified retirement plan (other than a Roth IRA) must take RMD after age 72, if the owner has reached 70½ years after 2019. (RMDs were to start after 70½ years for those who were 70½ years old before 2019.) The first RMD must be taken before April 1 of the year following the age of 72, and subsequent RMDs must be taken before December 31 of each year after the year of your 72 years old.

RMDs must be purchased by owners of traditional IRAs and other qualified defined contribution pension plans (including 401 (ks) and SEP).

To calculate your RMD for 2021, take the account balances as of December 31, 2020 for each of your IRAs. Then go to IRS publication 590-B, available for free on the IRS website at www.irs.gov. At the end of the publication are the life expectancy tables. Most people use Table III; married persons whose spouses are more than 10 years younger use Table II.

Find the life expectancy factor for your age in the appropriate table. Divide the value of each IRA by the life expectancy factor. The result is your RMD for that year for each IRA. You do this exercise every year.

Here are some key points and strategies to consider when planning your RMDs.

Use RMDs to manage your IRAs. When you have multiple IRAs, you calculate the RMD for each. Then you can add all the RMDs to determine the total RMD amount.

You can withdraw the overall RMD from your IRA accounts in the proportion you want. All RMDs can be extracted from a single IRA. You can withdraw roughly equal amounts from each IRA. Or you can take the IRA amount in any other ratio you want. The only requirement is that as of December 31, your total distributions from your traditional IRAs are at least equal to your total RMD for the year.

Some people take all of the RMD out of their smaller IRA until it’s used up. This simplifies their life by eliminating an IRA.

Others use the RMD requirement to rebalance their investment portfolios. Suppose US stocks have performed so well that they are overweighted in your total portfolio. You can sell stocks to fund the RMD. This satisfies both your RMD and rebalances your overall portfolio.

Adjust the number of ARIs. Some people have more than one IRA. You can reduce the number of IRAs and make your financial life easier by taking all of the RMD from the smaller IRA until it runs out.

You don’t need to hand out money. It is not necessary to sell an asset to make RMD. You can take RMD into ownership, known as in-kind distribution. This keeps your asset allocation unchanged.

For most IRAs, this simply involves asking the custodian to transfer a certain number of shares of a mutual fund or shares of the IRA to a taxable account. You must ensure that the value of the shares on the day of the distribution is at least equal to your RMD. The day value of the distribution is your tax base in the asset. Thus, in the future you will owe capital gains taxes only on the appreciation after that day.

An in-kind distribution can be particularly profitable when the value of an asset has fallen and you believe the decline is temporary. Distribute the depressed asset and the value on that day will be taxed as ordinary income for you. But you will only have to pay tax-advantaged capital gains taxes on the appreciation that occurs afterwards.

The in-kind distribution is also useful when you own unconventional assets in an IRA, such as real estate, mortgages, or a small business. It is difficult to assess and break down such assets. Instead, make an in-kind RMD by creating documents that transfer a percentage of the ownership of the asset to you. Make sure the percentage stake value is at least equal to your RMD amount.

Decide on the best time to take an RMD. You can take the RMD at any time of the year. Some people schedule monthly distributions at least equal to the RMD because they like regular cash flow. Others take their RMDs at the start of the year to make sure the task is done. Still others are waiting for the end of the year. They want to maximize earnings and tax-deferred income, and they want to delay paying estimated taxes on distributions.

You may want to monitor the value of assets during the year and distribute an in-kind investment after it declines.

Take more than the RMD. The RMD is the minimum that must be distributed each year. You can get more out of the IRA if you want or need it. You may want to receive a larger distribution when your taxable income is lower for the year, whether due to higher deductions or lower income. This will reduce the amount withdrawn next year when your tax rate might be higher.

Make your charitable donations with RMD. Your RMD can become a QCD (Qualifying Charitable Distribution) and increase after-tax income. A CDQ is generally the best way for people over 70 and a half to donate to charity.

Any taxpayer aged 70 and a half or older can have charitable contributions made directly from a traditional IRA to a charity. The contribution must be made directly by the IRA custodian to the charity or by check payable to the charity that the owner of the IRA can give to the charity. charity.

The charitable contribution is excluded from the gross income of the taxpayer and counts in the RMD for the year. The taxpayer does not benefit from any deduction for charitable donations. The exclusion limit is $ 100,000 per taxpayer per year. A married couple can potentially donate $ 200,000 this way, but each spouse must donate $ 100,000 from their own IRA.

Know when to aggregate and when not to. Be sure to include all IRA account balances when calculating the RMD. To this end, IRAs include SEP and SIMPLE IRAs. The balances of legacy IRAs and all employer plans, such as 401 (k) s, are do not included with other IRAs when calculating RMD. The RMDs of these other accounts are each calculated and taken separately.

Planning of the first RMD. The first RMD must be taken no later than April 1 of the year following the year you turn 72. If you turn 72 in June 2021, you have until April 1, 2022 to take that first RMD.

But it is considered your 2021 RMD, and you will probably want to take it before December 31, 2021. Otherwise in 2022 you will have to take that 2021 RMD plus your 2022 RMD. That gives you two RMD in a year and could push you into a higher tax bracket. (You use account balances as of December 31, 2020 to calculate the first RMD, whether you take it in 2021 or April 1, 2022.)