Fact Check: Are RMDs considered earned income?

Are RMDs Considered Earned Income?

The claim in question is whether Required Minimum Distributions (RMDs) from retirement accounts are considered earned income. This topic is significant for retirees and those managing their tax liabilities, as it affects how withdrawals from retirement accounts are treated under tax law.

What We Know

1. Definition of RMDs: Required Minimum Distributions are the minimum amounts that individuals must withdraw from their retirement accounts, such as traditional IRAs and 401(k)s, once they reach a certain age (currently 73, or 70½ for those who turned that age before 2020) 14.

2. Tax Treatment: RMDs are generally included in taxable income, meaning that they are subject to federal income tax. However, they are not classified as earned income, which typically refers to wages or salaries received from employment 256.

3. Earned Income vs. Ordinary Income: The IRS distinguishes between earned income (like wages from a job) and ordinary income (which includes interest, dividends, and distributions from retirement accounts). RMDs fall into the latter category 57.

4. Implications for Tax Reporting: RMDs must be reported on tax returns, and they can affect the taxpayer's overall income tax situation, potentially impacting eligibility for certain tax credits and deductions 10.

5. Exceptions and Special Cases: While RMDs are not considered earned income, there are specific rules regarding contributions to retirement accounts that require earned income. For instance, individuals cannot contribute to an IRA beyond their earned income for the year 8.

Analysis

The sources consulted provide a mix of authoritative information and practical guidance regarding RMDs and their classification for tax purposes.

• IRS Sources: The IRS is the primary authority on tax matters in the United States, and its publications 12 are generally considered reliable. However, they can be somewhat technical and may require careful interpretation.

• Financial Institutions: Sources like Vanguard 4 and Schwab 6 provide insights based on their expertise in retirement planning and tax implications. These institutions have a vested interest in ensuring that their clients understand the rules surrounding RMDs, which may introduce a slight bias towards clarity and compliance.

• Financial Blogs and Articles: Websites such as Thrivent 3, Kahn, Litwin, Renza 9, and Michael Ryan Money 7 offer practical advice and interpretations of tax law. While they can be informative, the reliability of these sources can vary, as they may not always be peer-reviewed or based on the latest IRS guidelines.

• Conflicts of Interest: Some sources may have conflicts of interest, particularly those affiliated with financial services firms that benefit from clients managing their retirement accounts in specific ways. This potential bias should be considered when evaluating their claims.

• Methodological Concerns: The claim that RMDs are not considered earned income is supported by multiple sources, but further clarification from IRS guidelines or tax professionals could enhance understanding. For example, exploring how RMDs interact with other forms of income and tax credits would provide a more comprehensive picture.

Conclusion

Verdict: False

The claim that Required Minimum Distributions (RMDs) are considered earned income is false. Key evidence supporting this conclusion includes the IRS's clear distinction between earned income—typically derived from employment—and ordinary income, which encompasses RMDs. RMDs are included in taxable income but do not qualify as earned income under tax law.

It is important to note that while RMDs are taxable, their classification as ordinary income rather than earned income has implications for tax reporting and eligibility for certain tax benefits. This distinction is crucial for retirees managing their financial planning and tax liabilities.

However, limitations in the available evidence should be acknowledged. While IRS guidelines provide a reliable framework, the interpretation of tax law can be complex, and individual circumstances may vary. Consulting with tax professionals can provide personalized insights that are not fully captured in general guidelines.

Readers are encouraged to critically evaluate information regarding tax matters and consider consulting authoritative sources or professionals for specific advice tailored to their situations.

Sources

1. IRS. "Retirement plan and IRA required minimum distributions FAQs." IRS
2. IRS. "Retirement topics - Required minimum distributions (RMDs)." IRS
3. Thrivent. "Is A RMD Considered Earned Income?" Thrivent
4. Vanguard. "Taxation of required minimum distributions." Vanguard
5. Tax Shark Inc. "Are Required Minimum Distributions (RMDs) Taxable?" Tax Shark
6. Schwab. "Retirement Income: Required Minimum Distributions." Schwab
7. Michael Ryan Money. "Is Your Required Minimum Distribution Considered Earned Income?" Michael Ryan Money
8. Retirement Watch. "What You Can and Can't Do with RMDs." Retirement Watch
9. Kahn, Litwin, Renza. "Are RMDs Considered Income?" Kahn, Litwin, Renza
10. Accounting Insights. "Where Does RMD Go on Form 1040? Reporting Requirements Explained." Accounting Insights