Required Minimum Distributions Suspended for 2020
The Coronavirus Pandemic has impacted so many areas of our lives, but there is one bright spot. The Required Minimum Distribution (RMD) Rules for IRAs and other Qualified Plans have been modified for 2020.
As you know, the traditional IRA and 401(k) accounts provide you with the opportunity to grow assets for retirement on a tax-deferred basis – meaning that the assets will be taxed upon distribution. I have always said that this means that that the Federal and State Governments are your “silent partners” in those accounts. They bide their time and wait until you take a distribution to levy their tax. Patience is not one of their virtues however, so they created the RMD rules to ensure that you begin taking distributions by 72. (The old rules had RMD’s starting at age 70 1/2.) The distribution is calculated each year based upon your age and the value of the assets in the account on December 31st of the previous year. Roth IRAs and Roth 401(k)s have the unique advantage of tax-free growth and distributions because those assets had previously been subjected to taxation.
While many clients need these distributions to maintain their standard of living in retirement, others are more fortunate and would prefer to let these assets continue to grow on a tax-deferred basis in the accounts if they could. Enter the Coronavirus Pandemic. The shock to the global economy and markets has caused investment accounts across the board to tumble. A bit of good news: the Coronavirus Aid, Relief and Economic Security (CARES) Act that was recently passed by Congress suspends RMDs for 2020. This provides investors with the option of leaving their assets invested to ride out the downturn rather than being forced to sell, lock in a loss and pay tax at these levels. Of course, if you need or simply want to take money out of and IRA or 401(k) you can still do that. It is generally understood that the suspension of RMD’s applies to Inherited IRAs and 401(k)s as well.
If you took your RMD in the first week of January 2020, you are likely out of luck. We are awaiting a ruling from the Internal Revenue Service on whether they will accept rollovers over 60 days. Others who took their distribution within the last 60 days may be able to do a “60-day rollover” to an IRA and not have that distribution be treated as taxable income. Typically you cannot rollover an RMD, but there have been many requests for the Service to accept these transactions.
The CARES Act also created a new exception for the 10% early withdrawal penalty under the Code for individuals taking retirement distributions before age 59 1/2. In 2020, individuals impacted by the coronavirus crisis can take up to $100,000 form their IRA or 401(k) without penalty. The distribution will still be subject to regular taxation however. To be eligible, the account owner would need to be diagnosed with COVID-19 or they would need to experience adverse financial consequences as a result of the crisis (laid off, furloughed, etc.)
As always, please reach out to us if you have any questions on any of this. We’d love to hear from you.