RMD Rule Change Under the CARES Act

Congress is effectively providing taxpayers with a waiver for 2020.

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Congress is effectively providing taxpayers with a waiver for 2020.

Under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, retirees who can afford to skip their 2020 Required Minimum Distribution (RMD) from workplace retirement plans and IRAs are allowed to do so without penalty. Congress is effectively providing taxpayers with a waiver for 2020.

However, the waiver of RMDs is not limited to qualified individuals. Rather, it is available to all taxpayers who have an RMD in 2020, as follows:

  • Those who turned 70½ in 2018 or earlier do not have an RMD in 2020.
  • Those who turned 70½ in 2019 and took their 2019 RMD in 2019 have no 2020 RMD. Those who turned 70½ in 2019, but waited to take their 2019 RMD until 2020 (i.e., on or before April 1, 2020) also have no RMD for either 2019 or 2020.
  • Those turning 70½ in 2020 would not have an RMD this year anyway since the Required Beginning Date was changed to age 72 by the SECURE Act.

For some, not taking funds out of their retirement plans during a year when the stock market is on a roller coaster ride is a good opportunity. That said, there are many retirees who count on the annual RMD for living expenses. But if the distribution hasn’t already factored into your budget, the waiver provides some flexibility to safeguard your hard-earned retirement funds.

Waiving the RMD will lower your taxable income for 2020, helping you avoid the need to potentially sell investments that have decreased in value during this tumultuous year. That’s the good news—but you should also be aware of the long-term effects. By not taking your RMD this year, future RMDs could increase (due to the fact that your overall account balance may increase), which might place you into a higher tax bracket in future years. A solution may be to consider taking a distribution this year but limiting it to an amount that won’t bump you into a higher tax bracket.

So, what if you have already taken your RMD for 2020? If the distribution was taken in January of this year, sorry to say, but it’s a done deal. However, if you took it between February 1 and May 15, 2020, you can generally roll it over within 60 days of when you took the RMD. The 60-day deadline for completing a rollover has just been extended until August 31, 2020, to give taxpayers time to take advantage of this opportunity. Doing so will place the RMD amount back into your retirement plan. (If taxes were withheld, you will need to use other funds in order to rollover the full amount of the distribution, and then claim any taxes withheld as a credit on your 2020 tax returns.)

It should be noted that you generally cannot make more than one rollover from the same IRA within a one-year period. You also cannot make a rollover during this one-year period from the IRA to which the distribution was rolled over. Since January 1, 2015, the IRS rule has been that you can make only one rollover from an IRA to another (or the same) IRA in any 12-month period, regardless of the number of IRAs you own.

Modifications to the CARES Act have been happening at a quick pace, making it difficult at times to keep up with and understand new guidance. A CPA or investment adviser can help you navigate these sometimes-murky waters so that you make the best financial decisions for you and your family.

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Disclaimer: Any written tax content, comments, or advice contained in this article is limited to the matters specifically set forth herein. Such content, comments, or advice may be based on tax statutes, regulations, and administrative and judicial interpretations thereof and we have no obligation to update any content, comments or advice for retroactive or prospective changes to such authorities. This communication is not intended to address the potential application of penalties and interest, for which the taxpayer is responsible, that may be imposed for non-compliance with tax law.

Disclaimer:  The contents of this resource are for general informational purposes only. While every effort has been made to ensure its accuracy, the information is provided “as is” and no representations are made that the content is error-free. We have no obligation to update any content, comments or other information for retroactive or prospective interpretations or guidance provided by regulators, financial institutions or others. The information is not intended to constitute legal advice or replace the advice of a qualified professional. There are areas of the CARES Act where additional clarification from the Treasury Department and the SBA is needed. Your judgment and interpretation of the act may be needed. Users should consult with their legal counsel and representatives of the lending institution regarding the proper completion of their application and supporting documentation.

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