Managing retirement savings during turbulent markets
Morgan Stanley private wealth adviser Mary Deatherage joins Barron’s Roundtable to discuss what retirement savings options will help generate income in a low-yield environment.
If you have money in a retirement savings plan that isn't a Roth IRA, you're probably familiar with required minimum distributions, or RMDs. RMDs were initially required starting at age 70 1/2, but that age was recently pushed back to 72.
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Taking RMDs is no big deal for some seniors — namely, those who need that money anyway to pay their bills. But if you typically take your RMD not because you want to, but because you have to, then you're probably aware that doing so can be a pain for a couple of reasons.
First, by removing that money from your retirement plan, you lose the option to invest it in a tax-advantaged fashion. Second, RMDs from a traditional IRA or 401(k) create a tax obligation for you. Not only must you pay taxes on the money you remove from your account, but your RMD could push you into a higher tax bracket altogether.
It's for these reasons that many seniors wish RMDs were avoidable. And this year, they are.
The CARES Act has suspended RMDs
Normally, you're required to take an RMD every year, but this year, you get a pass due to the COVID-19 pandemic. In March, the CARES Act was passed to provide relief in light of the ongoing crisis, and one of its provisions waived RMDs this year.
That's good news if you were hoping to avoid taking a withdrawal from your savings. But what if you did so already?
Thankfully, you're not out of luck. The CARES Act allows savers to return RMDs that were already taken earlier in the year to their retirement plans. But you'll need to act quickly if that's the route you want to take. The deadline to roll your money back into a retirement plan is Aug. 31, so you have less than two weeks to act.
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Should you return your RMD?
Many seniors are desperate for money at present, and if you're one of them, returning your RMD may not be an option. But if you don't need that money to pay your immediate expenses — say, you can get by on your Social Security benefits and other income — then it pays to put that money back into your retirement plan.
Once that cash is back in your IRA or 401(k), you'll get to continue investing it in a tax-advantaged manner. Also, returning your RMD can lower your tax burden this year, possibly pushing you into a lower tax bracket. And, depending on your circumstances, putting back your RMD might help you avoid paying federal taxes on your Social Security benefits.
If your provisional income — your non-Social Security earnings plus 50% of your annual benefits — for the year falls between $25,000 and $34,000 as a single tax filer, or between $32,000 and $44,000 as a married couple filing jointly, then up to 50% of your Social Security benefits could be taxed. And if your provisional income is above $34,000 as a single tax filer or exceeds $44,000 as a joint filer, you could be taxed on up to 85% of your benefits. By returning your RMD, you might push yourself right below these thresholds, so if you don't need the money, it's worth doing.
If you're not sure how to return your RMD, contact your retirement savings plan administrator and ask for instructions. But hurry, because time is running out to get that money back into your account.
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