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Retirement Planning > Spending in Retirement > Required Minimum Distributions

Put Those RMDs Back. Now.

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RMD 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.

Most of the tax software on the market would tell you that Alex is in a 12% bracket. So, it may appear that there is no reason to worry about the RMD. However, you could save him about $1,230 in taxes, or 41%, by changing the IRA withdrawal from $20,000 to $17,000. For each dollar he reduces his RMD, he saves 41%. Reduce the RMD by another $7,000 and he’ll save roughly 50%.

Alex’s tax prep software told him that he is in a 12% tax bracket. What happened? Part of the reason for this massive reduction is the interaction between the IRA money and the capital gains outlined above, but in this case, each dollar reduction in the RMD also drops 85 cents of a Social Security dollar back into tax-free range, which in turn takes another 85 cents of a capital gain dollar out of the 15% capital gains bracket and into the 0% bracket.

It’s common for retirees to experience the interactions between different types of income. Reducing RMDs by $10,000 for this year is clearly the right choice for Alex, and if he had already taken his RMD, he now has a way to fix it, at least until August.

What does this mean for advisors? It’s time to revisit every client who had a required minimum distribution come out early in 2020 and consider what their tax situation will likely be at the end of the year. You have until Aug. 31 to help your clients get those dollars back into the account.

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Joe Elsasser, CFP, CovisumJoe 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.

In 2016, Covisum introduced Tax Clarity, which helps financial advisors show their clients the hidden effective marginal income tax rates that can significantly affect cash flow in retirement. In early 2017, Covisum acquired SmartRisk, software that allows advisors to model “what-if” scenarios with account positions and align a client’s risk tolerance with their portfolio risk. In January 2019, Covisum launched Income InSight, an income planning tool.

Covisum powers some of the nation’s largest financial planning institutions and serves more than 20,000 financial advisors.


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