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. Unless further clarification is presented, it is implied that those who have inherited an IRA are not required to take RMDs in 2020.
Can I Return Money I’ve Already Withdrawn?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. If you had already taken your RMD for the year, you can not return it.
However, there is a “loophole” of sorts. If you have taken an RMD within the last 60 days, you do have the option to roll this amount over into an IRA. This option can only be done once in a 12-month period, but it may be beneficial for those who took their RMD just before the law was passed.
This 60-day rollover option is not available to those withdrawing from an inherited account.
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
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. Since then, we’ve entered a bear market and are experiencing general economic volatility. Waiting to take RMDs until 2021 gives retirees a chance to, hopefully, see their accounts regain some value lost over the past couple of months. Withdrawing now would mean retirees are left paying taxes on value that no longer exists in their accounts.
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.
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