IS IT TRUE THAT RMDs ARE NOT MANDATORY IN 2020?
CORONAVIRUS AID, RELIEF, AND ECONOMIC SECURITY (CARES) ACT
If you’re over 70½ and have an IRA or 401(k)-type plan, you’re probably familiar with Required Minimum Distributions (RMDs). These are annual withdrawals from a retirement plan mandated by law and calculated by the IRS each year. Recent legislation, however, has changed that mandate, at least for 2020.
The recently passed Coronavirus Aid, Relief, and Economic Security (CARES) Act includes a number of measures designed to stimulate the economy. One of its provisions allows retirees and those who have inherited IRAs to abstain from taking RMDs from IRAs or 401(k)-type plans this year.
RMD amounts are based on the value of the account at the end of the previous year. So far, 2020 has seen considerable market volatility, resulting in a steep decline in most retirement accounts. Because of this, the amount required to withdraw would have been a much larger percentage of a retiree’s account than in previous years. The new law lets you keep that money in your accounts, potentially recouping some of the market losses when the economy turns around.
Below are answers to some common questions we have been asked by retirees about RMDs as they relate to the CARES Act:
1. Do I have to take RMDs from retirement accounts in 2020?
No, all RMDs have been suspended for 2020. This waiver includes any retirement account subject to RMDs, such as IRAs, 401(k)s, Roth 401(k)s, and inherited accounts.
2. What age do I have to be in order to qualify for the waiver?
If you are subject to RMDs, the waiver applies to you regardless of age. It includes original account owners over age 70½ (or 72, under the Setting Every Community Up for Retirement Enhancement Act or SECURE Act1), original account owners who turned 70½ in 2019 but have not taken their distribution yet, and inherited-IRA beneficiaries of any age.
3. I inherited an IRA. Does the waiver apply for me?
Yes, the waiver extends to inherited IRAs (including stretch IRAs). It even appears that inherited IRAs with non-spousal beneficiaries, which would normally need to be liquidated within 5 years of the original account holder’s death, are not required to take a distribution in 2020. You should consult with your tax advisor, but Day Hagan’s interpretation is that beneficiaries have an extra year to fulfill the 5-year requirement since RMDs can be skipped in 2020.
4. If I already took an RMD in 2020, can I reverse it?
Based on our current understanding of the CARES Act, technically, the distribution cannot be reversed. However, if the distribution was within the last 60 days, we believe that you can recontribute the amount into your retirement account—assuming the distribution qualifies for a rollover. (This does not include most inherited retirement accounts). Unfortunately, you cannot reverse the tax withholding, but depending on other factors in your tax situation, the IRS could refund the withdrawal when your 2020 return is filed.
5. What if I took my 2020 RMD more than 60 days ago?
It may be possible to recontribute the distribution if you can demonstrate a coronavirus impact as defined by section 2202 of the CARES Act.2 Broadly speaking, it is an “impact” if you, a spouse, or somebody in your household got the virus, or if the virus negatively affected you financially (such as making you unable to work, or getting laid off). You may be able to count the distribution as coronavirus-related and recontribute the amount over the next three years.3
6. If I have an inherited IRA and already took an RMD for 2020, can I recontribute the distribution?
Inherited IRA distributions are not generally eligible for a rollover; therefore, assuming the IRS offers no other guidance, distributions that have already been taken cannot be recontributed.4 However, it is possible that a beneficiary affected by the coronavirus will be able to count the amount as a coronavirus-related distribution and recontribute the amount.
7. Is my defined benefit plan (such as pensions) also included in the RMD waiver?
No, defined benefits plans are not included. If you are supposed to take distributions from a defined benefit (DB) plan, you must continue to do so.
8. Under Internal Revenue Code 72(t), I’m taking “substantially equal periodic payments” penalty-free from my retirement account. Does the RMD waiver apply to me?
No, it does not appear the waiver covers this type of distribution. A substantially equal periodic payment is not the same as an RMD, which means you will have to continue to take those distributions.
Expect more details from the IRS soon.
Consider these questions and answers an initial interpretation of the new law—not personalized tax advice. For that, you should talk with a CPA or tax professional who is familiar with your particular situation.
In the meantime, the IRS will be releasing additional guidance in the coming days or weeks to address other questions raised because of the CARES Act. Day Hagan will be watching closely for that guidance. As always, please do not hesitate to reach out to us with questions, and we will be happy to assist you in finding answers.
Sincerely,
Natalie Brown, CFP®
Director of Client Services
Day Hagan Private Wealth
—Written 06.17.2020.
PDF Copy of the Article: Day Hagan Private Wealth Insights: RMD Requirements for 2020 (PDF)
REFERENCES
1 Congress.gov. H.R.1865. Further Consolidated Appropriations Act, 2020. Retrieved May 15, 2020, from Congress.gov: https://www.congress.gov/bill/116th-congress/house-bill/1865/text The Setting Every Community Up for Retirement Enhancement Act of 2019 or SECURE Act, is part of the Further Consolidation Appropriations Act which passed in the House in July, was approved by the Senate on Dec. 19, 2019.
2 Congress.gov. H.R.748- CARES ACT. Retrieved May 15, 2020, from Congress.gov: https://www.congress.gov/bill/116th-congress/house-bill/748/text#H494B3579358A4C50B94D0ECFA8754882
3 Congress.gov. H.R.748- CARES ACT. Retrieved May 15, 2020, from Congress.gov: https://www.congress.gov/bill/116th-congress/house-bill/748/text#H40D17F7800A24828B9876E2DA8E1FA3E
4 It is possible that a spouse who inherited a retirement account may be able to have a distribution qualify for a rollover. Speak to a tax professional if you fall into this particular situation to determine if your distribution is rollover-eligible.
Original article source: Charles Schwab. Schwab.com. Can You Forgo Taking RMDs in 2020? Retrieved June 17, 2020, from Schwab.com: https://www.schwab.com/resource-center/insights/content/can-you-forgo-taking-rmds-2020
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