Advisors must ask: "Is the IRA income desirable on the client's return?" (Photo: Shutterstock)
The deadline for fixing required minimum distributions (RMDs) that came out of client accounts prior to the passage of the Coronavirus Aid, Relief and Economic Security (CARES) Act is rapidly approaching. Advisors have until Aug. 31 to replace any amounts that came out of an IRA, that would have otherwise been considered an RMD for 2020, back into those accounts.
While the CARES Act allowed IRA owners to forego making required minimum distributions after March 27, the legislation failed to address the minimum distributions that came out prior. The IRS then issued Notice 2020 — 51 in June to give those individuals the opportunity to fix the RMDs that came out before the CARES Act was passed in March.
For advisors, the first step is to answer this key question: "Is the IRA income desirable on the client's return?" Sometimes the answer is yes. For others, taking at least some portion of the distribution this year will help keep future years' distributions and resulting tax liabilities down if future RMDs are more than they need to meet their lifestyle goals.
In other cases, the minimum distribution may have created a situation where Social Security income is now being taxed, capital gains are being pushed out of a 0% tax bracket and into a 15% bracket or even creating a 3.8% net investment income tax. So, removing RMDs from the return can have a really significant positive impact on the client's retirement income plan.
Let's take a look at an example. Alex Johnson turned 74 this year and has $36,000 of Social Security income. He expects around $15,000 of net long-term capital gains this year and has $10,000 of interest from bonds and other savings. He also has $20,000 of RMDs.
Joe Elsasser developed his Social Security Timing software in 2010 because, as a practicing financial advisor, he couldn't find a Social Security tool that would help his clients make the best decision about when to elect their benefits. Joe later founded Covisum, a financial tech company focused on creating a shared vision throughout the financial planning process.
