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The recently enacted Coronavirus Aid, Relief, and Economic Security (CARES) Act is a $2 trillion response bill intended to provide economic relief across the American economy. It contains many broad-reaching measures—such as emergency relief for small businesses and expanded unemployment benefits—as well as retirement-related relief including relief from having to take 2020 required minimum distributions (RMDs).
Let’s review the basics of RMDs, as well as how the requirements have changed for 2020—and what it can mean for you.
As an owner of a tax-deferred retirement account (such as an individual retirement account [IRA]) or as a plan participant in a tax-qualified plan, you generally must start withdrawing a certain amount of money from your account each year after you reach a certain age (see below). This is known as a required minimum distribution, or RMD.
Retirement accounts to which RMD rules apply include traditional, rollover, SIMPLE and SEP individual retirement accounts (IRAs); along with 401(k)s, 403(b)s, 457(b)s, profit-sharing and other defined contribution plans.
Failing to take your RMD by the due date each year (typically December 31 except with respect to your first required distribution, which can be delayed until April 1 of the following year) could result in a 50% tax penalty on the amount you did not withdraw.
In January 2020, many provisions of the Setting Every Community Up for Retirement Enhancement (SECURE) Act took effect. The SECURE Act included more than 20 provisions designed to preserve and expand retirement savings.
Under the SECURE Act, the RMD starting age is 72 for individuals who attain age 70.5 after December 31, 2019 (under prior law, the RMD starting age was 70.5). Extending the age limit from 70.5 to 72 provides individuals greater ability to keep their assets in retirement accounts longer.
The CARES Act permits defined contribution plan participants and IRA owners to avoid taking RMDs in 2020. Unlike some other retirement-related provisions of the CARES Act, this provision applies to all individuals, whether or not they have been directly impacted by the coronavirus.
This includes individuals with IRAs, including inherited IRAs and individual retirement annuities that haven’t been annuitized, as well as defined contribution plans, such as 401(k), 403(b) and 457(b) plans. However, it doesn’t apply to RMDs under defined benefit plans.
Also, if you turned age 70.5 in 2019 and delayed taking your RMD until 2020, that RMD is also waived.
What if you took RMDs in 2020 before the CARES Act was enacted? In general, you can potentially roll a distribution to an eligible retirement plan or account if it’s done within 60 days of the distribution. The IRS recently extended the 60-day rollover deadline to August 31, 2020 for distributions taken between January 1, 2020 and August 31, 2020. There are rules relating to rollovers including certain restrictions on the number of rollovers permitted per year that you should review with your Ayco advisor. Rollovers are subject to complex rules and requirements, and the IRS may issue further guidance regarding rollovers. Please consult your personal tax advisor regarding rollovers and your individual circumstances.
What about distributions related to inherited accounts subject to the “five‐year rule” (i.e., the entire account value must be withdrawn before December 31 of the fifth year following the original owner’s death)? Under the CARES Act, 2020 won’t count in the computation of the five‐year period. This has the effect of adding another year to complete the distribution. The rules regarding distributions from inherited IRAs are complex. You should consult your personal tax advisor regarding your specific circumstances.
Skipping your RMD this year can provide your retirement portfolio with more opportunity to recover from the recent stock market downturn.
Additionally, it may offer some financial relief since you won’t owe taxes on the money you would have withdrawn through your RMD. That also may be helpful considering your 2020 RMD would be based on your account balance on December 31, 2019, when the stock market was at near-record highs.
You can still take a distribution this year if you want to. Either way, you should coordinate with your IRA custodian or plan administrator to understand how they are handling distributions this year. Finally, if you do need money to help pay the bills and have other liquid resources you can tap into, you may want to consider those options as they may be more tax efficient.
In most cases, assuming you can afford to, there may not be a significant economic downside to not taking RMDs in 2020. In fact, doing so may be financially helpful as described above. But, keep in mind you’ll need to start taking the RMD again in 2021, and the 2021 RMD will be calculated based upon year-end 2020 values (which will include amounts not taken in 2020 because of the waiver).
Reach out to your Ayco advisor if you have questions about RMDs, the 2020 waiver or your situation.
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Insights from Ayco InnerCircle 2021
By Brandon Ross