The Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, was signed into law on March 27, 2020. This law was created in response to the COVID-19 pandemic, which has had a tremendous impact on the financial and physical health of Americans and businesses across the country. While there are many facets to this new law, one area in particular has presented an interesting opportunity for retirees. We’ll discuss the recent change to required minimum distributions (RMD) and why you may want to consider taking advantage of this opportunity.
What Does the CARES Act Say About RMDs?
In Section 2203 titled, “Temporary Waiver of Required Minimum Distribution Rules for Certain Retirement Plans and Accounts,” those who are typically required to take minimum distributions from their retirement savings accounts will not be required to do so for the remainder of 2020.1
Who Will This Impact?
Simply put, this will affect anyone who would normally have to take an RMD in 2020, whether it’s coming from a company 401(k), 403(b) or an IRA.
As a reminder, in December 2019, the SECURE Act was passed - changing the age at which an individual is required to begin taking minimum distributions.
According to the IRS: “If you reached the age of 70½ in 2019 the prior rule applies, and you must take your first RMD by April 1, 2020. If you reach age 70 ½ in 2020 or later you must take your first RMD by April 1 of the year after you reach 72.”2
With that being said, however, the CARES Act has put a pause on RMDs - even for those who turned 70 ½ in 2019.
Are Inherited IRAs Included in the CARES Act?
While the language of the CARES Act does not mention Inherited IRAs specifically, it does say RMDs have been put on pause for all retirement accounts. Further clarification has been presented and those who have inherited an IRA re not required to take RMDs in 2020.
Can I Return Money I’ve Already Withdrawn?
This change to RMDs is valid for the entire year of 2020, starting January 1. But the CARES Act did not go into effect until the end of March. Previously the rule stated that if you had already taken your RMD for the year, you can only return it if the distribution was taken within the last 60 days.
As of yesterday (June 23, 2020), the IRS issued Notice 2020-51 that addresses this issue. The notice clarifies that people who took their RMDs anytime this year can redeposit their RMDs to accommodate the CARES Act RMD suspension for 2020 under new rules that apply to 2020 RMDs. A return of the funds to the retirement plan/IRA will be treated as a rollover if it is done prior to August 31, 2020.
Notice 2020-51 also states that “The repayment will be treated as a rollover for purposes of § 408(d)(3) of the Code, but will not be treated as a rollover for purposes of the one rollover per 12-month period limitation in § 408(d)(3)(B) and the restriction on rollovers for nonspousal beneficiaries in § 408(d)(3)(C).”
Considerations About Skipping RMDs in 2020
The biggest advantage of skipping your RMDs for 2020? A reduced tax bill. Since that money would normally count as income, you’d be on the hook for a higher tax bill come next tax season - if you chose to take your RMDs as usual. But in a time where many are facing critical financial struggles, this is one way in which the government is looking to ease financial stress for retirees.
Another important consideration to note is that RMDs are based on “the account balance as of the end of the immediately preceding calendar year divided by a distribution period from the IRS’s ‘Uniform Lifetime Table,’” according to the IRS.3
The CARES Act has presented retirees with a potentially advantageous opportunity. While the option is still on the table to withdraw what you need from your retirement account, you are not required to do so until 2021. If you’re wondering whether or not to take advantage of this ruling, talk to your financial advisor first. Together, you can evaluate and readjust your retirement plan in accordance with these changes.
This content is developed from sources believed to be providing accurate information, and provided by Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.