One of the facets of the CARES act is the ability to skip Required Minimum Distributions (RMD) from retirement accounts for 2020. The ability to do this is one of the Government's responses to COVID-19. But should RMDs be skipped? Here are some things to consider.
The Money is Needed
If Mom or Dad need the funds to meet required living expenses, there isn't really much of a decision to make. The funds are needed. But do the funds need to come from a retirement account? Perhaps Mom or Dad has some cash value in a life insurance policy? Or maybe a reverse mortgage or HELOC can help weather the storm. That could be better than selling into the teeth of a bear market.
But, if other options are not available, then a withdrawal from the retirement accounts may be a necessity. Hopefully, there is a cash balance available in the retirement account. If not, look at selling assets that are over-allocated to bring the portfolio back into balance.
Money isn't Needed and Funds are 100% Invested in Securities
If Mom or Dad is in his or her seventies, then letting the year pass and the letting markets hopefully recover may be a better idea than taking an RMD this year. While there is no guarantee the markets will recover by the end of 2021, it is a given that they are down from their peaks now.
Mom (or Dad) is "Getting On" in Years or the Investment Accounts are Very Large
If due to either age or size of the retirement accounts RMDs are quite large, you'll want to look a little closer. By delaying a year, the denominator in the equation to calculate RMDs is smaller by approximately 1. And at least hopefully, the balance will be larger at the end of 2020 (which sets the numerator). This could cause a not insignificant increase in the 2021 RMD. This increase could cause Mom or Dad to go into a higher tax bracket or even worse, in a couple of years significantly increase their Medicare premiums (as they are determined by AGI). The increase in Medicare premiums could be significantly more than the increase in taxes.
Skipping the RMD could also make a larger portion of Social Security taxable in 2021. But at least theoretically, less Social Security will be taxable in 2020. You'll just need to check.
Help With All This Stuff
Active and Retired Senior Military Officers' and NCOs' financial lives can be pretty complicated. On top of that, you may need to help Mom and Dad too. If you'd like some help, give us a call.
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