Some older Americans will get a special tax break this year.
But if you’re eligible and you don’t act fast, you could lose it.
Retirees aren’t required to take minimum distributions
(RMDs) from their retirement accounts in 2020. If you withdrew money earlier
this year and don’t need it to live on, then you have until Aug. 31 to return
it if you don’t want those funds counted toward your income for the year.
In a typical year, people age 72 and over must take a set
amount of money based on an IRS formula from their retirement accounts and pay
income taxes on that money. These withdrawals are Uncle Sam’s way of finally
collecting his cut of the savings that’s grown tax-deferred over the decades.
But 2020 is hardly a typical year, and in March Congress waived the RMD
requirement for all types of retirement plans including IRAs, 401(k)s, 403(b)s,
457(b)s, and inherited IRA plans. (Lawmakers took similar action during the
Great Recession, waiving the RMD requirement for 2009.)
Returning an unwanted RMD to your account can save you on
income taxes for the year. Also, if your RMD would have pushed you into a
higher income bracket for the purpose of calculating Medicare premiums and the
portion of your Social Security income that’s taxed, then it could save you
additional money.
Fidelity Investments recommends making sure the money is
received by the Aug. 31 deadline, not postmarked by then, says Melissa Ridolfi,
the company’s vice president, college and retirement leadership. Fortunately,
digital banking can make it easy to meet the deadline. Fidelity has seen a
sharp increase in customers’ use of mobile check deposits during the pandemic.
Your brokerage firm sends you a Form 1099-R when you
withdraw money from your retirement account and a Form 5498 when money is
contributed to the account. Hang onto both for when you file your 2020 taxes.
Another key point: Many people automate their RMD
withdrawals. Those who turned that function off for this year should make sure
to turn it back on for next. The penalty for skipping an RMD is hefty: 50% of
the money you didn’t distribute on time. “2021 is around the corner,” Ridolfi
says.
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