The CARES Act and Your Retirement: 2020 Required Minimum Distribution Waiver
Most everyone has heard by now that the CARES Act, technically the Coronavirus Aid, Relief, and Economic Security Act, provides for the distribution of stimulus checks to many Americans; however, there’s more to this act. Today we’ll focus on one of the biggest impacts of the CARES Act for those over age 70, which is the waiver of Required Minimum Distributions for most retirement accounts for the year 2020.
The Basics
A Required Minimum Distribution, commonly referred to as an RMD, is the minimum amount that must be withdrawn, and included in taxable income as applicable, from a retirement account once an owner turns 70½ (now age 72 thanks to the SECURE Act). RMDs also apply to individuals who have inherited retirement accounts.
The idea behind the provision to waive RMDs is that with markets down sharply at the time the act passed, retirement account owners may be forced to sell their assets at lower values in order to comply with the minimum withdrawal rules. The waiver provision does not prohibit you from withdrawing from your retirement accounts if you need or want to do so – you simply aren’t required to make a withdrawal.
It’s important to note that not all retirement accounts are eligible for the waiver. The retirement accounts included in the waiver are:
IRAs: Traditional, SEP, SIMPLE
Defined Contribution Plans: 401(k), 401(a), 403(b), 403(a), Thrift Savings Plans, governmental 457(b)
Any of the above types that have been inherited
If you’ve already taken your Required Minimum Distribution and are now feeling some remorse, you may be able to return the funds back to the IRA as an indirect rollover. Take note that there are strict rules around this such as: inherited accounts are ineligible for this rollover strategy, the funds generally must be returned within 60 days of the withdrawal (though there are exceptions), and you can only execute one indirect rollover per twelve-month period. These rules can get tricky. Please contact us if you have any questions.
A Few Planning Opportunities to Consider
Qualified Charitable Contributions
Even though the Required Minimum Distributions have been waived for 2020, IRA owners can still execute Qualified Charitable Distributions (QCDs). This means if you are charitably inclined and are otherwise eligible (over 70½ and own an IRA), you can contribute up to $100,000 directly from your IRA to a qualified charity and the contribution will not be included in taxable income. Now that many taxpayers are no longer itemizing, this donation strategy is even more appealing.
Roth Conversions
With the market down, no required distributions, higher tax rates expected in the future, and potentially low taxable income in some cases, it could be a good time to consider converting pre-tax IRA dollars to after-tax Roth dollars through a Roth Conversion. With this strategy, you will pay income tax on the amount converted from the traditional account to the Roth account, ideally at a lower rate than what you expect in the future. Once the assets are converted, you won’t pay income tax on any future income, gains, or distributions from the Roth account. This could potentially be a very beneficial planning opportunity for many, even those who aren’t age 70½ yet , especially in the midst of this perfect storm of events.
As always, whether you need to or should withdrawal from your retirement account or execute any of the planning opportunities mentioned depends on your unique situation and should be considered as part of your comprehensive financial plan. Please contact us if you have any questions or if you’d like to explore these opportunities.