One of the changes prompted by the Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, that has the biggest potential to impact your retirement has to do with RMDs. As you know, due to the pandemic, RMDs were waived for the 2020 tax year. Thanks to that provision, along with the SECURE Act raising the age for taking first-year RMDs to 72, many who would otherwise be dealing with RMDs on their 2021 tax return are getting a temporary break.
However, even if you may not have to start dealing with RMDs for another five or 10 years, that doesn’t mean you should put off preparing for them. We can’t stress enough that having the right strategy to satisfy your RMDs can be one of the most important elements of a successful retirement plan.
RMDs start at almost 4% of your IRA balance and increase each year as you get older, and the penalty for not taking sufficient RMDs is 50%!
Once you’ve properly calculated what your RMDs will be, the most important thing to consider is whether you have the right asset allocation to satisfy them. In my experience, that means an allocation that can generate at least 4% in dividends or interest.
If you’re earning less, that means you might have to tap into the principal balance of your savings to satisfy your RMDs, which could lead to the cannibalization of your savings. The bottom line is that even if the current crisis or the SECURE Act have given you some additional time before your RMDs kick in, the sooner you adopt a sound strategy for satisfying them, the better prepared you’ll be.
