3 Reasons to Return Your 2020 Required Minimum Distribution

Required minimum distributions (RMDs) are a nonevent for some seniors, but for others, they're nothing short of a nightmare. If you have your retirement savings in an account that isn't a Roth IRA, you're required to take annual RMDs starting at age 72, and if you fail to take your RMD, you'll be fined to the tune of a 50% tax penalty on the amount you neglect to remove.

The problem with RMDs is twofold. First, they can add to your taxable income, causing you to owe the IRS more money and potentially putting you in a position where your Social Security benefits become taxable. Second, once you remove that money from your retirement plan, you lose the ability to keep it invested in a tax-advantaged fashion. Older man typing on laptop while older woman sits next to  him holding document

Image source: Getty Images.

Normally, RMDs are nonnegotiable, but this year, you can get out of taking one as part of the CARES Act, which was signed into law earlier in the year to provide COVID-19 relief. And if you've already taken your RMD, you can return it to your retirement plan, provided you do so by Monday, Aug. 31.

But should you return that distribution? Here are three reasons to consider doing so.

1. You don't need the money

A lot of people are in dire financial straits during the COVID-19 crisis, but if you're doing well enough that you don't need the money, it pays to put it back. You can keep it invested and grow it into a larger sum.

2. You're already looking at higher taxes because of investment gains

Not everyone is doing poorly during the ongoing crisis. In fact, the stock market has recovered very nicely since it crashed in March. If you bought stocks back then, and have since sold those stocks at a profit, you'll be liable for short-term capital gains taxes, which are more expensive than taxes on long-term gains. As such, you may want to avoid adding to your tax burden by returning your RMD, which is taxable if it comes from a traditional IRA or 401(k).

3. You want to lower your future Medicare costs

What do RMDs have to do with Medicare? A lot, actually. RMDs are counted as income for the year you take them. Meanwhile, your Medicare premiums are based on your modified adjusted gross income (MAGI) from two years prior. There's a standard Part B premium that's imposed every year, but if your MAGI exceeds a certain threshold (which also changes from year to year), you'll be subject to a surcharge. That surcharge applies to Part D prescription plan premiums as well.

Meanwhile, your MAGI from 2020 will dictate whether you're liable for that surcharge in 2022, and keeping your RMD could push you right over that income threshold. But if you return that RMD, it won't count as income this year, which could save you money on Medicare down the line.

There are plenty of good reasons to return this year's RMD, but get moving: You only have a few days to put that money back into your IRA or 401(k), or else you're stuck with it.

The $16,728 Social Security bonus most retirees completely overlook
If you're like most Americans, you're a few years (or more) behind on your retirement savings. But a handful of little-known "Social Security secrets" could help ensure a boost in your retirement income. For example: one easy trick could pay you as much as $16,728 more... each year! Once you learn how to maximize your Social Security benefits, we think you could retire confidently with the peace of mind we're all after. Simply click here to discover how to learn more about these strategies.

The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Latest Markets Videos

The Motley Fool

Founded in 1993 in Alexandria, VA., by brothers David and Tom Gardner, The Motley Fool is a multimedia financial-services company dedicated to building the world's greatest investment community. Reaching millions of people each month through its website, books, newspaper column, radio show, television appearances, and subscription newsletter services, The Motley Fool champions shareholder values and advocates tirelessly for the individual investor. The company's name was taken from Shakespeare, whose wise fools both instructed and amused, and could speak the truth to the king -- without getting their heads lopped off.

Learn More