Breaking the Code: CARES Act - 2020 RMDs
By: Tony Khalife, CPA, MST, CFP®
The CARES Act was enacted on March 27, 2020 in response to the Coronavirus / COVID-19 pandemic. One major provision of this act is the waiver of the 2020 required minimum distribution (RMD). We’ve outlined some of the specifics below if you have not yet taken your RMD for 2020 or if you would like to roll 2020 RMDs back into retirement accounts.
Are RMDs required in 2020?
If you have retirement accounts subject to RMDs (401(k) plans, IRAs, SEP IRAs, defined contribution plans, etc.), the distribution requirement for 2020 has been suspended. This waiver applies to anyone over age 70 ½ (or 72 if the SECURE Act applies). Additionally, the IRS has further clarified that any beneficiaries of Inherited IRAs are also exempt from the 2020 distribution requirement regardless of age. The waiver does not apply to defined benefit plans or anyone taking “substantially equal periodic payments” under IRC 72(t), which is not the same as an RMD.
What happens if I already received my RMD for 2020 prior to the CARES Act?
Many taxpayers have their RMDs set on automatic schedules to avoid the administrative burden or chance of potentially forgetting to take the minimum distribution. Some clients have these set monthly, in the beginning of the year, or the end of the year.
Normally, you have 60 days to re-contribute or rollover any distributions back into a qualified account. If you received an RMD for 2020 and decided you do not need the funds/income, you could return the distribution to that account or another qualified account within 60 days. If the distribution was more than 60 days prior, the IRS is now granting taxpayers until August 31, 2020 to rollover or re-contribute the prior distribution. This can be done for any and all RMDs in 2020, including those from Inherited IRAs. After the August 31st deadline, taxpayers would still have the normal 60-day rollover rule to return any distributions. Please note that this can be avoided by stopping any automatic RMDs or not taking the RMDs at all for 2020.
Planning Opportunity
The waiver of the 2020 RMD requirement provides taxpayers with significant flexibility and planning opportunities. Taxpayers can waive the distribution requirement to reduce their ordinary income. If cash flow is an issue, we recommend selling stock or other capital assets and utilizing the preferential long-term capital gain rates (compared to ordinary income tax rates with RMDs). Alternatively, if distributions are not needed and cash flow is not an issue, a Roth conversion may make sense depending on other sources of income and overall estate planning considerations.
The CARES Act has provided a unique opportunity for tax planning for 2020. Please do not hesitate to contact us regarding your 2020 RMDs and any questions you may have.
To ensure compliance with the requirements imposed on us by IRS Circular 230, we inform you that any tax advice contained in this communication (including any attachments) is not intended to and cannot be used for the purpose of: (i) avoiding tax-related penalties under the Internal Revenue Code, or (ii) promoting, marketing or recommending to another party any tax-related matter(s) addressed herein.