The Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, was created in response to the COVID-19 pandemic and was signed into law on March 27, 2020. COVID-19 has had a tremendous impact on the financial and physical health of Americans and businesses across the country. There are many features of this new law, but one specific change to required minimum distributions (RMDs) has presented an interesting opportunity for retirees.
The CARES Act – 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 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.
Back in December 2019, the SECURE Act was passed which changed 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
However, the CARES Act has put a pause on RMDs – even for those who turned 70 ½ in 2019.
The CARES Act – Inherited IRAs
Even though 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.
I’ve Already Withdrawn Money – Can I Return It?
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, 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. It should be noted that this 60-day rollover option is not available to those withdrawing from an inherited account.
Should I Skip My RMD In 2020?
The biggest advantage of skipping your RMDs for 2020 is a reduced tax bill. If you choose to take your RMD as usual, this money taken out would count as income, so you would have a higher tax bill next year. In a time where many are facing critical financial struggles, the government is looking to ease financial stress for retirees by allowing them to skip RMDs this year.
It is also important to note 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, the market has experienced general economic volatility and waiting to take RMDs until 2021 will hopefully give retirees a chance to see their accounts regain some of those lost values. Taking the money out now means retirees would be left paying taxes on value that no longer exists in their accounts.
One of the aspects of The CARES Act has presented retirees with a potentially advantageous opportunity. While those that need are still able to withdraw from their retirement accounts, those who typically have RMDs are not required to take them until 2021. If you have any questions about whether or not to take your RMDs this year, please contact us – we are here to help!