In addition, the employee who is receiving RMDs from that employer’s 401(k) plan must have the option to continue making salary deferrals as long as the plan allows it. The 401(k) employer also must continue contributions for an employee who is receiving RMDs from the plan.
Because an RMD from a Section 401(k) or other qualified retirement plan is not able to be rolled over, it is NOT subject to mandatory federal income tax withholding of 20 percent.
Exploring RMD Options
It’s important to have a discussion with your clients about RMDs as they relate to retirement income strategy. RMDs are required by the IRS, but there are several options to consider if your client’s don’t need their RMDs for income—here are a few options:
Essential expenses: Your clients could use their RMDs for essential expenses since they have to withdraw them anyway. Clients could consider annuities and life insurance products with options for lifetime income.
Discretionary expenses: Maybe your clients need the money in the future for some discretionary expenses. They could set up a future stream of payments using their RMDs. Or they could fund a qualified longevity annuity contract (QLAC), and defer RMDs on a portion of the IRA to provide some longevity protection with future guaranteed income.
Legacy: If your clients wish to leave a legacy, their RMD may be a great mechanism for funding it. Clients can use life insurance policies, including universal or whole life or policies with second-to-die options that might further leverage the RMDs with a spouse. They may also want to fund a non- qualified annuity contract that could, once again, take advantage of tax deferral until the owner passes away.
If they don’t need the income and are contributing to charity, then your clients could consider sending their RMD to their favorite charities.
If your clients don’t need the income and if they meet certain requirements, they can make a qualified charitable distribution (QCD). QCDs have become more popular as a way for retirees to donate money to their favorite charity while possibly lowering their Federal tax obligation. The Tax Cuts and Jobs Act (TCJA) of 2017 nearly doubled the standard deduction to $12,000 for a single person and $24,000 for a married couple filing jointly. As a result, it is likely more taxpayers will take the standard deduction instead of itemizing, and therefore be unable to deduct their charitable contributions. This is where a QCD can help.
Beginning in the year they turn age 70½, your clients can make a QCD directly from the traditional IRA in amounts up to $100,000 per year. By using a QCD, taxpayers can use all or part of the RMD to make charitable contributions directly to a charity of their choice and exclude the contribution amount from income. A QCD allows clients to satisfy RMD requirements while contributing to charity and simultaneously saving money on taxes.