Here is what you need to know.
Financially, many of us associate April with taxes — but we should also associate April with important IRA deadlines. April 1, 2020, is the deadline to take your Required Minimum Distribution (RMD) from certain individual retirement accounts.
A new federal law must be noted here. The Setting Every Community Up for Retirement Enhancement (SECURE) Act, passed late in 2019, changed the age for the initial RMD for traditional IRAs and traditional workplace retirement plans. It lifted this age from 70½ to 72, effective as of 2020. So, if you were not 70½ or older when 2019 ended, you can wait to take your first RMD until age 72. If you were 70½ at the end of 2019, the old rules still apply, and your initial RMD deadline is April 1, 2020. Your second RMD will be due on Dec. 31, 2020.
Keep in mind that withdrawals from traditional, SIMPLE, and SEP-IRAs are taxed as ordinary income and if taken before age 59½, may be subject to a 10% federal income tax penalty.
To qualify for the tax-free and penalty-free withdrawal of earnings from a Roth IRA, your Roth IRA distributions must meet a 5-year holding requirement and occur after age 59½. Tax-free and penalty-free withdrawals can also be taken under certain circumstances, such as a result of the owner’s death. The original Roth IRA owner is not required to take minimum annual withdrawals.
April 15, 2020, is the deadline for making annual contributions to a traditional IRA, Roth IRA and certain other retirement accounts. The earlier you make your annual IRA contribution, the better. You can make a yearly IRA contribution any time between Jan. 1 of the current year and April 15 of the next year. Accordingly, you can make your IRA contribution for 2020 any time from Jan. 1, 2020, to April 15, 2021.
You may help manage your income tax bill if you are eligible to contribute to a traditional IRA. To get the full tax deduction for your 2019 traditional IRA contribution, you have to meet one or more of these financial conditions:
- You aren’t eligible to participate in a workplace retirement plan.
- You are eligible to participate in a workplace retirement plan, but you are a single filer or head of household with Modified Adjusted Gross Income (MAGI) of $64,000 or less. (Or if you file jointly with your spouse, your combined MAGI is $103,000 or less.)
- You aren’t eligible to participate in a workplace retirement plan, but your spouse is eligible and your combined 2019 gross income is $193,000 or less.
Thanks to the SECURE Act, both traditional and Roth IRA owners now have the chance to contribute to their IRAs as long as they have taxable compensation (and in the case of Roth IRAs, MAGI is below a certain level).
In addition, if you are making a contribution early in the year, make clear the year you would like it to be applied. If you fail to indicate the tax year that the contribution applies to, the custodian firm may make a default assumption that the contribution is for the current year. Therefore, write “2020 IRA contribution” or “2019 IRA contribution” and the account number in the memo area of your check. If you make your contribution electronically, double-check that these details are communicated.
A last reminder for those who turned 70½ in 2019: You need to take your first traditional IRA RMD by April 1, 2020, at the latest. The investment company that serves as custodian (host) of your IRA should have alerted you to this deadline; in fact, they have probably calculated the RMD amount for you. Your subsequent RMD deadlines will all fall on Dec. 31.
Dave B. Rao is the founder of RAO Wealth Partners. He focuses his practice on helping to advise physicians, corporate executives and business owners on their unique financial situations. For more info, visit raowp.com.
Our firm does not render legal or tax advice. This article was written for our firm and provided courtesy of MarketingPro. Investments in securities and insurance products are NOT FDIC-INSURED/NOT BANK-GUARANTEED/MAY LOSE VALUE. Rao Wealth Partners is an independent firm. Securities are offered through Cetera Advisor Networks LLC., member FINRA and SIPC. Advisory services are offered through Summit Financial Group, Inc., a registered investment adviser. Client Assets held at First Clearing, LLC (a wholly owned Wells Fargo Subsidiary). Summit and Cetera are affiliated are under separate ownership from any other named entity.