New RMD Tables For 2022 Are Out. Get Them While They’re Hot?

There are probably very, very, (very) few people out there excited for the announcement of new life expectancy tables used to determine required minimum distribution (RMD). I mean, let’s be honest, nobody is every really gets excited for IRS announcements. While I can’t say this announcement made my day, I did think it was some really good information worth sharing with you as it could have a substantial impact on your retirement savings and financial plans. Furthermore, the IRS does not normally revise their RMD tables, so this was notable (In fact, it’s been almost 20 years since the last revision). As you probably well know, RMDs are waived for 2020 and 2021 RMDs will follow the existing RMD tables. Again, these RMD changes won’t go into effect until 2022 so, of course, I encourage you to start thinking about it now when it comes to what you want to do with your RMDs and whether your current retirement plans might be impact by an RMD change. If you aren’t familiar with life expectancy tables, there are three that the IRS uses when determining RMDs for those old enough to take them and their beneficiaries: The Uniform Lifetime Table (used to calculate YOUR lifetime RMDs), the Joint and Last Survivor Table (used for when your spouse is your sole beneficiary and is more than 10 years younger than you), and the Single Life Table (when used by an “eligible designated beneficiary” such as a minor child or a surviving spouse). The new changes will most likely lower RMDs for most Americans, which also means lower taxes on your RMDs. Lower taxes means you can spend more of your nest egg on retirement and you. Maybe some IRS announcements aren’t so bad after all.

An IRA Loan? Yea, Don’t Do That.

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It can be tempting to look at your nest egg and see an untapped source of money, particularly if your nest egg is sizeable and you are nearing retirement. For example, maybe you found your dream retirement home and need money for a down payment. You may look to your IRA for a short-term loan to meet those money requirements. I’m here to tell you that that is a bad idea and to discourage you not to do so. The biggest reason being that you don’t want to tap into your IRA monies until you actually retire and, even then, you will want to have a plan for doing so. You’ve worked hard to save up for your post-work life and you want to make sure that money goes towards your retirement goals (of course, if purchasing a retirement home is part of your plan, then that’s a different discussion). The other risk of viewing your IRA as a loan source is the risk of making a mistake when taking out money. Keep in mind that there are two routes you can go when taking money out of your IRA before reaching retirement age. First off, you can take a distribution, pay the taxes and penalties, and then not have to worry about what you do with the money. The other option is to take out the money and do a 60 day rollover, which will involve paying back the money within that 60 day window. There’s a lot of risk involved with that. I repeat, there is a lot of risk involved with doing this. Mainly, if you take out the money, is there any guarantee that you will recoup it within that 60 day window? Chances are, you are going to be making a large purchase if you need a loan (probably talking thousands of dollars), so what are the chances that you will make that money back in two months? If you are certain that you can do that, then maybe you can consider it. However, if you aren’t so sure that you can complete such a transaction in that timeframe, stay away from this idea. That can lead to a lot of problems if you aren’t able to put the money back within those 60-days. Hint: Don’t open yourself up to the IRS taking more of your money through penalties! If you are in need of money, you should consider other types of loans or selling off other assets before even considering your IRA as a loan source. You may even want to really think about whether you even need to make the purchase at that time and whether you can put it off until you actually have the funds and leave your retirement money alone.

Life is Unexpected. The IRS Has Got Your Back?

Life can be unpredictable. What might seems like a good idea today can become a bad idea tomorrow. Thus, it can be hard to truly plan for the future when you don’t know what it holds. It’s also what makes life so unpredictable. Luckily (or should that be surprisingly), the IRS realizes this and has allowed some flexibility with what you can do with your IRA(s). For example, they know that there may be times when you need more money than your annual required minimum distribution (RMD). Therefore, they allow for you to take about more than your RMD amount. Another example is that they allow you to take a withdrawal–obviously, so long as you meet requirements–even if you already took your RMD. Even if you rolled that RMD back into your IRA, you can still take a distribution. Keep in mind with rollovers, there is still a once-per-year rule, but that is suspended for 2020 RMDs until August 31, 2020 (you have until that date to roll your 2020 RMD back into your IRA). While the IRS often gets painted as cruel, they do realize–occasionally–that life can be have some unexpected turns and that you should be able to have to flexibility financially to meet those twists and turns. If you want to roll your 2020 RMD back into your IRA or just want to figure out whether you can take our more than your RMD, I strongly encourage you to talk with a certified financial planner or wealth managers. They can help to make sure you take the right steps.

The Stretch IRA is Dead. Does That Mean More Freedom?

If you’ve been staying on top of retirement news over the past 12 months, then you’ve probably read about the passage of the SECURE Act and it’s termination of the stretch IRA as an estate planning tool. Just a quick refresher, but a stretch IRA was an IRA inherited by a beneficiary in which the beneficiary then took required minimum distributions (RMDs) according to his/her life expectancy and not that of the original IRA owner. If the IRA was inherited by a young beneficiary, that meant the funds could grow, possibly over decades, before the inheriting beneficiary reaches 72 and has to start taking RMDs. The SECURE Act got rid of that and replaced the Stretch IRA with a 10 year rule, which means that the money in the inherited IRA must be emptied by the 10th year after inheriting. Of course, if there is money left over, it will be penalized by the IRS (what else is new, right?). This might seem like a hassle, but it can actually allow a lot of freedom, particularly in regards to when you take the money. Over that 10 year period, you are not required to take money every year. Now, you could do that if you wanted, but you could also take distributions 8 out of the 10 years or 5 out of 10 years. This can open up a lot of opportunities to adjust your financial and retirement plans and use the money at your discretion. All that matters is the account is empty by year 10. Of course, if it’s a Roth IRA, the money is already taxed, which is an added bonus. If you have questions about the 10 year rule or it appears that you may inherit one on the future and want to start planning what to do with the money, you should speak with a certified financial planner or wealth manager.

Miss an RMD? Don’t Panic, But Don’t Brush It Off, Either.

It can be easy to forget about required minimum distributions (RMDs), especially as you move into retirement or if you inherit an IRA. Now, forgetting to take an RMD isn’t the absolute end of the world, but it should not be taken lightly. The penalty to missing an RMD is half the amount that was to be distributed, which is quite harsh and can be a substantial amount of money depending on the size of your retirement savings. So, what should you do if you forgot to take an RMD or you learned that you needed to take one from an inherited RMD? First off, withdraw the RMD out of the account as soon as you realize you need to take it. Next you will need to report the mistake to the IRS on the Form 5329, which can be filed along with your annual tax returns. On the form, make sure to report the RMD that should have been distributed, the amount distributed before the deadline, any reasonable cause amounts you would like waived, the penalty amount, and a letter explaining the reason for missing the RMD. Finally, and this is very important, do not pay the penalty until you hear back from the IRS with a denial or approval of your reason for the mistake. If your reason is denied, the IRS will then ask for payment of the penalty. As with anything involving the IRS, unless you are absolutely certain you know what you are doing, you should consider either hiring a financial advisor or tax professional to fill out and file your From 5329 so as to make sure it is done correctly. If you don’t want to have them actually file for you, you may want to at least consider talking to them during the process so as to make sure you’re doing things right. Remember, the key thing is that you correct your mistake as soon as you realize it and that you be honest with the IRS. Chances are your excuse won’t be accepted, but you will only have to pay the RMD penalty and nothing more. Missing and RMD is no laughing matter, but it’s not something you need to have a meltdown over, either. Just stay calm and do what you need to do!

The Cautions of Backdoor Roth IRA Conversions

A backdoor Roth IRA conversion can be tempting if you are considering retiring early and are currently over the income limits for a Roth IRA contribution. In case you are unfamiliar, a backdoor Roth IRA conversion is where you contribute money to a traditional IRA and then convert that money into a Roth IRA. This is a useful transaction for those who earn too much income to contribute to a Roth IRA as Traditional IRAs have no income limits. It’s also a perfectly legal transaction. However, when doing a backdoor conversion, keep in mind that the taxman will get his due and that this is not a way to avoid paying taxes on IRA contributions. The money you convert will most likely count as income and you will have to pay taxes on the money in your Traditional IRA that hasn’t already been taxed. It’s also important to understand how the IRS looks at your retirement funds. If you have more than one IRA, the IRS looks at the total of your IRAs and not just the IRA you make the conversion from. This can really pose a problem if you have more than one IRA with a large balance and may make you walk away from doing a backdoor Roth IRA conversion if the taxes are too high. Income limits are another important thing to understand when doing a backdoor Roth IRA conversion. Doing one backdoor conversion doesn’t mean you can start making regular contributions to the newly created Roth IRA. Rather, you will need to do a backdoor conversion every year that you are over Roth IRA income limits, which can potentially be for many years, especially if you are a high-income earner early in your career. That’s a lot of backdoor conversions and that can leave you open to the possibility of making more mistakes. A mistake on a backdoor Roth IRA conversion can be costly depending on the amount you convert and it can be as much as 6% of the conversion if you do so over the income limits. Since backdoor Roth IRA conversions are not particularly common and require a lot of thought, you should seek out the advice of a certified financial planner before doing one.