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RMDs Are Back. What's Your Strategy?

February 16, 2021

Shortly after the pandemic hit, the CARES Act was passed in March 2020, allowing those age 72 or over to waive their required minimum distributions, or RMDs. While that resulted in a significant reduction in taxable income for many retirees in 2020, RMDs are back this year, along with the potential tax burden and steep penalties (50% of the required distribution amount) for those who fail to take them by year end. In addition, many retirees, especially those who did not take RMDs last year, may be subject to higher distribution amounts this year, due to higher account balances. That makes it even more important to have a strategy in place for managing RMDs.

RMDs are commonly used to supplement income received in retirement from guaranteed income sources, such as Social Security or a pension. You can choose to take RMDs on a regular schedule throughout the year, such as monthly, quarterly or semiannually, or once a year as a lump sum. However, it’s important to remember that distributions from qualified retirement accounts are taxable, so if you choose not to have taxes automatically withheld, you’ll need to set money aside to pay any taxes owed on your distributions.

Should You Take Regular Distributions or a Lump Sum?
Many people find it easier to manage their income and expenses in retirement by taking distributions throughout the year. In addition to providing regular cash flow, regular installments can help ensure that you receive a range of  prices for the assets you sell, which may provide some stability during periods of increased market volatility. Regularly scheduled distributions can also help retain the benefits of tax-deferred compounding in your retirement account(s) throughout the year, versus taking a lump sum withdrawal at the beginning of the year. If you don’t need the regular income, waiting until year-end to take a lump sum distribution may also help bolster tax-deferred growth, as your money remains invested in your account(s) throughout the year. However, because markets fluctuate over time, there is no guarantee that account values will be higher or lower at the time you take your distribution(s). In addition, taking a large lump sum withdrawal may also create the need to rebalance your portfolio.

Managing Your Tax Burden
There are many ways to help manage taxes associated with RMDs. Those who may not need the income from an RMD, and are seeking to avoid taxable distributions, may choose to make a qualified charitable distribution (QCDs). A QCD allows you to donate up to $100,000 annually directly from a traditional IRA to an eligible charitable organization without counting that amount as taxable income. Instead, it would count toward your RMD and reduce the taxable amount of your mandatory withdrawal. Other options for managing taxes on income in retirement may include a Roth IRA conversion, which requires paying taxes on any amounts converted in the year assets are converted. (Roth IRA accounts are not subject to RMDs). Since these strategies are complex and may have significant tax consequences, it’s important to meet with your tax and financial professionals before taking action. If you have questions, call the office to schedule time to talk about your retirement income strategy.

5 Ways to Bring More Balance to Your Life in 2021
The COVID-19 pandemic has up-ended many norms and routines from family and social gatherings, to community activities, how we shop, and how we access services, such as healthcare and transportation. That’s a lot of change to digest in a relatively short period of time. It’s no wonder that separate surveys conducted by researchers at the Boston University (B.U.) School of Public Health and Johns Hopkins University found that the prevalence of depressive symptoms (B.U.) and “serious psychological distress” (Hopkins) reported during the COVID-19 pandemic were triple the level measured in 2018. According to the B.U. study, these rates were higher than those seen after other large-scale traumas like September 11 and Hurricane Katrina.1

If you’re feeling somewhat off-kilter, consider the following steps to help restore a sense of balance in your life.
1. Recognize when life feels unbalanced: The first step is acknowledging that some anxiety is natural. Whether you’re feeling sad, stressed, or anxious, know that you’re not alone. Take time to understand how you’re feeling and why. It may be helpful to talk through your emotions with a therapist or a friend for support.
2. Find the tools that work for you: Instead of focusing on what is out of your control, try to channel your energy toward familiar things that provide you with a sense of comfort, whether that’s reading mystery novels, baking, painting, gardening, or other activities and pastimes.
3. Set goals: Goals give you something to work toward, which can be particularly helpful when it becomes hard to differentiate one day from the next. You don’t have to take up a new hobby or activity to challenge yourself, either. Maybe there’s a yoga pose you have yet to master, you’re looking to improve your golf game, or you finally have a chance to organize that box of old photos. Completing a goal of any size provides a sense of accomplishment, which can go a long way toward restoring a sense of meaning and order in your life.
4. Meditate: The pandemic has created a cottage industry of self-help tools, including online and mobile meditation apps and podcasts. If you’re new to meditation, consider a guided progr While some apps are free, most offer trial periods before requiring a paid subscription, so you can determine which work best for you.
5. Find opportunities to laugh: Laughter really is some of the best medicine. Not only does it release endorphins, the body’s “feel good” hormones, but it helps lower levels of cortisol (a stress
hormone) and epinephrine (adrenaline). It also affects your dopamine and serotonin levels, which are neurotransmitters that play a role in happiness and pleasure.2
1 http://www.scientificamerican.com/article/the-surprising-mental-toll-of-covid/
2 http://www.mayoclinic.org/healthy-lifestyle/stress-management/in-depth/stressrelief/art-20044456

For a comprehensive review of your personal situation, always consult with a tax or legal Advisor. Neither Cetera Investment Services, nor any of its representatives may give legal or tax advice.

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