Permalink Submitted by Alan - IRA critic on Tue, 2020-07-21 15:51
An RMD is intended to generate the taxes that were deferred when the contributions were made in taxpayer’s earnings years, and on the gains generated on those contributions over several decades. The tax advantage is generally for the US Treasury, not the taxpayer. The entire process benefits the taxpayer if the taxpayer’s marginal rate is higher when contributing than when taking RMDs, usually after retiring. Perhaps you are asking whether for 2020 when RMDs are waived if the taxpayer should take a distribution regardless to shrink the IRA value. In that case, many taxpayers are converting an amount to a Roth IRA since 2020 is the only year left where a conversion would be in addition to the RMD. A conversion reduces future RMDs by reducing the IRA value each year, and moves the money to a Roth which has no RMDs while the taxpayer is still living or for their surviving spouse. So this can be an advantage in some cases, although the taxpayer gives up the much lower tax bill for 2020 which would apply if no distribution is taken at all. In deciding to convert it is useful to determine the tax bracket you will be in for the conversion and the bracket you will be in if RMDs in the future are higher. If the RMD % is 5% (late 70s), the next few RMDs will be reduced by 5 or 6%, which is unlikely to reduce the marginal rate. It depends on where you fall in the projected bracket. You would also want to factor in IRMAA, the Medicare surcharge that kicks in when AGI exceeds about 87k (single) or 174k (joint filers).
Permalink Submitted by Alan - IRA critic on Tue, 2020-07-21 15:51
An RMD is intended to generate the taxes that were deferred when the contributions were made in taxpayer’s earnings years, and on the gains generated on those contributions over several decades. The tax advantage is generally for the US Treasury, not the taxpayer. The entire process benefits the taxpayer if the taxpayer’s marginal rate is higher when contributing than when taking RMDs, usually after retiring. Perhaps you are asking whether for 2020 when RMDs are waived if the taxpayer should take a distribution regardless to shrink the IRA value. In that case, many taxpayers are converting an amount to a Roth IRA since 2020 is the only year left where a conversion would be in addition to the RMD. A conversion reduces future RMDs by reducing the IRA value each year, and moves the money to a Roth which has no RMDs while the taxpayer is still living or for their surviving spouse. So this can be an advantage in some cases, although the taxpayer gives up the much lower tax bill for 2020 which would apply if no distribution is taken at all. In deciding to convert it is useful to determine the tax bracket you will be in for the conversion and the bracket you will be in if RMDs in the future are higher. If the RMD % is 5% (late 70s), the next few RMDs will be reduced by 5 or 6%, which is unlikely to reduce the marginal rate. It depends on where you fall in the projected bracket. You would also want to factor in IRMAA, the Medicare surcharge that kicks in when AGI exceeds about 87k (single) or 174k (joint filers).