“All good things must come to an end” (Geoffrey Chaucer, 14th Century). Alas, it rears its ugly head again on January 1, 2021, with the return of Required Minimum Distributions (RMDs) from Qualified Retirement Accounts.
As an optimist, I was hoping that the 2020 RMD “sabbatical” might be repeated in 2021, due to ongoing COVID-19 economic difficulties. Our incredible market rebound since March of this year has virtually eliminated any chance of a second year of reprieve, and RMDs remain slated to resume their mandate in January 2021.
Although about 80% of Qualified Retirement Account owners withdraw more than their required withdrawals annually, a smaller, significant, population was grateful for the 2020 suspension. We hoped that another year of RMD reprieve would follow, reducing taxable income again next year, and not influencing the income-based cost of Medicare Parts B and D. That prospect is not looking good, so we have to plan accordingly. But, there is good news for some age groups. Here are a few highlights:
• For taxpayers born after June 30, 1949, initial RMDs are not required for another year, as the Required Beginning Age was raised from 70-1/2 to 72, eliminating 2021 RMDs for affected taxpayers
• Life Expectancy Tables have been revised to reflect longer average life spans, lowering the amount of all RMDs (unfortunately, this provision does not take effect until January 1, 2022)
• Proposals now in front of Congress would increase maximum purchases of Qualified Longevity Annuity Contracts (QLACs) from $135,000 to $200,000; a brief explanation of these contracts and their potential RMD-reducing impact follows
Qualified Longevity Annuity Contracts, or QLACs, are insurance products designed for Retirement Account owners who wish to reduce their RMDs for a period of time. Maximum values of QLACs have been raised from $130,000 to $135,000; however, those values continue to also be limited to 25% of the Retirement Account value, and so maybe reduced. The QLAC does not pay dividends or interest, so QLAC returns are totally based on reduced RMDs. This reduces current income, and, ipso facto, also reduces current taxes on income.
QLAC maturity (date of the first annuity payment) is flexible and is set by the account owner at contract purchase, with a maximum maturity age of 85. Upon maturity, the QLAC pays a taxable annual distribution to the account owner until death, similar to an RMD. The original contract value is guaranteed by the insurance carrier, so any unpaid premium dollars will be returned to the account prior to the account being inherited.
We assume that the 2020 RMD suspension has come to an end, but not without some additional benefits for many owners of Qualified Retirement Accounts. Rattling around the hallowed halls of Congress is a proposal to increase the Required Beginning Distribution Age to 75 from the recent 72. An optimist can always hope for the passage of this helpful change.
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