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, as you know, 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 specific area has presented an interesting opportunity for retirees. In this post, 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.
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.”
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, the June 23rd, 2020 IRS notice (Notice 2020-51) clarified that inherited IRAs are included.
Can I Return Money I’ve Already Withdrawn?
No and yes. 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. Notice 2020-51 also clarified that RMDs already taken in 2020 can be returned to the IRA by August 31, 2020. The relief applies to all types of IRAs, including inherited IRAs and other defined contribution retirement accounts.
Considerations For 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 would 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.
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.
In other words, your RMD would be determined based, in part, on the account balance as of December 31, 2019, a time in which markets were strong and nearing a peak. Waiting to take RMDs until 2021 may give retirees a chance to see their accounts regain value, though markets have, for the most part, come back in the last few months.
Another consideration and tax planning strategy is to skip RMDs for 2020 and instead use this opportunity to plan a Roth conversion. This essentially allows retirees the option to move money into a tax-free account for the future (the conversion would, of course, be taxed similarly as a distribution).
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, we are always available to talk through your options. Please don’t hesitate to reach out if you’d like to discuss this further.
Erickson Braund is the Founder and Chief Financial Officer at Black Walnut Wealth Management. He is a Certified Financial Planner®️ professional and a Chartered Retirement Planning Counselor®️. Eric brings over 20 years of experience working with high net-worth individuals and families, helping them achieve their goals of protecting and growing their wealth for retirement and for generations to come. Because Eric is a CFP®️ professional, he adheres to high ethical standards and engages in at least 30 hours of approved continuing education in the financial industry each year.
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