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Retirement savers who took a mandatory distribution from a retirement account this year have a week to put the money back.
The CARES Act, the coronavirus relief bill signed into law this spring, allows people with retirement accounts to skip required minimum distributions for 2020.
RMDs are the annual withdrawals you’re required to take from your individual retirement account and each of your 401(k) plans after you turn 70½ — or, as of this year, 72.
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If you inherited an IRA, you normally must take an RMD. These beneficiaries are also allowed to skip the withdrawal for 2020.
Savers who already took the withdrawal have until Aug. 31 to put the money back.
Assuming you don’t need the money, replacing the RMD can help you cut down your tax bill for this year, as the withdrawal is subject to income tax.
But there’s a benefit for individuals on Medicare: Replacing the funds can reduce your modified adjusted gross income, which can lower the cost of your premiums for Medicare Part B (medical insurance) and Part D (prescription drug coverage) in 2022.
“The single biggest thing to remember is that $1 over the modified adjusted gross income range means that you’re at the new premium amount,” said Jamie Hopkins, director of retirement research at Carson Group in Omaha, Nebraska.
“If you look at it for an individual, $1 more of taxable income from an RMD you took in January this year could cause a $1,000 increase in premiums in 2022,” he said.
Know your brackets
Your premiums for Medicare are based on your modified adjusted gross income from two years prior.
For 2020, single taxpayers with a 2018 MAGI that’s up to $87,000 (or $174,000 if they’re married and filing jointly) are paying monthly premiums of $144.60 for Medicare Part B.
The premium amounts rise based on Medicare subscribers’ MAGI, all the way up to $491.60 per month for individual taxpayers with a 2018 MAGI of $500,000 or more.
Brackets are also in place for Part D prescription drug coverage. See below.
The income brackets themselves are firm; there are no phaseouts. That means that if your income exceeds the top end of a bracket by even a dollar, you’ll be subject to higher premiums.
“If you took one of these distributions this year, you have a short period of time to act,” said Hopkins.
Other steps to reduce income this year include making charitable donations if you’re a taxpayer who itemizes deductions on a tax return.
That means you claim write-offs — including charitable giving, medical deductions and more — in excess of the standard deduction of $12,400 for single filers or $24,800 for married-filing-jointly.
Coordinate with your accountant and your financial advisor to determine what steps might be right for you.
“This should be something advisors are doing every year with their clients,” Hopkins said. “It’s something everyone should pay attention to.”
Avoid last-minute flubs
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Don’t let deadline pressure trip you up when you return your RMD. Avoid these last-minute errors, says Ed Slott, CPA and founder of Ed Slott & Co. in Rockville Centre, New York.
• Skipping a return of your taxes: When you take an RMD, your custodian will withhold some of the money for taxes. If you return the funds, make sure you give back the income taxes that were withheld and not just the net amount received.
• Calling off monthly distributions: To simplify cash-flow planning, some retirees take their RMDs in 12 monthly disbursements. Return all the money, along with the taxes, and stop the payments for the rest of the year.
• Make sure your custodian labels the transaction correctly: Be sure your custodian labels your RMD reversal as a “return of funds,” and not as a contribution.
Excess contributions are subject to a 6% tax each year as long as the excess amount stays in the individual retirement account.