South Florida Sun-Sentinel (Sunday)
Reader questions: RMDs and capital gains
Q: I am 79 and have been taking required minimum distributions (RMDs) regularly each year from my 403(b) account. My former employer asked me to return to work as an adjunct professor. I receive no pay. The employer indicated in a letter that I have returned to work, and that my pension will not be impacted unless I work more than a specified number of hours. I work less than the specified number of hours, so my pension is not affected. My question is whether I am still required to take an RMD this year.
A: I ran the question by an attorney with Ed Slott & Co. Their response was that the “still working exception” allows participants to delay RMDs if they are still working, but there is no guidance regarding what constitutes “still working.” Their take was that if you are not being paid, it might be aggressive to say you are still working.
I informed the reader regarding the attorney’s response. Because of a possible disagreement with the IRS, he decided to take his normal RMD in 2021.
Q: I currently participate in my employer’s Roth 401(k). I plan on retirement in the near future. You indicated that individuals with Roth 401(k)s are required to take RMDs, but that holders of Roth IRAs are not. When I retire, I have the option to roll over my Roth 401(k) to a Roth IRA, and thus not be required to take an RMD each year when I reach 72. Is there any reason I should not do that?
A: No. As long as you select a Roth IRA with low annual costs and choices that are at least as good as you now have, there is no reason for you not to consider a conversion to a Roth IRA. You will be able to make withdrawals of the amount converted without penalty.
However, you will incur a penalty if you withdraw earnings before five years after your conversion.
Q: I am considering selling some securities that have increased in value. Naturally, I want to minimize any income taxes associated with the sale. I have held the assets longer than a year, so I would be subject to long-term taxes on the sale. I understand that there is no capital gains tax for gains less than $80,000 on my return. My question is this: If my gains on the securities sold exceeds $80,000, do I owe 15% taxes on the amount over $80,000, or do I owe the total amount of the profit?
A: For your 2021 tax return, if you are married filing jointly, your capital gains tax rate is 0% if your taxable income is less than $80,800 (or $40,400 if you’re filing singly). For 2022, the taxable income thresholds for 0% capital gains tax rise to $83,350 for joint filers and $41,675 for single taxpayers.
Q: My wife inherited two traditional IRAs in February 2021 from her mother, who passed away. One of the IRAs was inherited by my wife’s mother from my wife’s father several years ago. He had been taking RMDs from that account at that time. Because he had been taking RMDs already, my wife’s mother had continued to take RMDs based on her husband’s life expectancy. My wife’s adviser indicated that she is required to continue to take RMDs based on her father’s life expectancy. Is that correct? The second IRA my wife inherited was from her mother. Is my wife required to continue taking RMDs on that account?
A: Because your wife inherited these IRAs in February 2021, which is after the SECURE Act became law, your wife is not required to take any RMDs associated with these accounts. She can withdraw any amount she chooses to during the first nine years without penalty. As you may know, since they are traditional IRAs, any withdrawals would be taxable at ordinary income tax rates. But all of the funds in the IRAs will have to be withdrawn by the end of the 10th year in order to avoid any penalties.