The CARES Act (or the Coronavirus Aid, Relief, and Economic Security Act) was signed into law on March 27, 2020, and creates a tremendous reason to connect with your financial advisor. Created in response to the COVID-19 pandemic, the CARES Act looks to make a tremendous impact on the financial and physical health of Americans and businesses across the country. While there are many components in the text of the law, one area in particular may present an opportunity that retirees should discuss with their financial advisor. In this blog post, I want to discuss the recent change to required minimum distributions (RMD) and why you may want to consider taking advantage of this opportunity.
How Does the CARES Act Address RMDs?
Section 2203 is titled, “Temporary Waiver of Required Minimum Distribution Rules for Certain Retirement Plans and Accounts,” and it says those who would otherwise be required to take minimum distributions from their retirement savings accounts will not be required to do so for the remainder of 2020.1
Who Does This Impact?
Whether the distribution would come out of a company 401(k), 403(b) or an IRA, this will affect anyone who would normally have to take an RMD in 2020. This temporary measure takes precedent over the SECURE Act passed in December 2019, which changed the age at which an individual is required to begin taking minimum distributions.
According to the IRS: “If you reached the age of 70½ in 2019 the prior rule applies, and you must take your first RMD by April 1, 2020. If you reach age 70½ in 2020 or later you must take your first RMD by April 1 of the year after you reach 72.”2
The CARES Act has put a pause on RMDs, even for those who turned 70½ in 2019.
Are Inherited IRAs Included in the CARES Act?
While the language of the CARES Act does not specifically mention IRAs that were inherited, it does say RMDs have been put on pause for all retirement accounts. Unless further clarification is provided, the implication is that people who have inherited an IRA are not required to take RMDs in 2020.
Can I Return RMD Money I Withdrew Before the CARES Act?
Technically... no, but there may be a loophole for you. While this change to RMD requirements is valid for all of 2020 starting January 1, the CARES Act did not go into effect until the end of March. If you had already taken your RMD for the year, you cannot return it.
However, if you have taken an RMD, and you're still within 60 days of the distribution, you can roll this amount over into an IRA. This option is only available once within a 12-month period, but it may be an effective work-around for those who took an RMD right before the law was passed.
This 60-day rollover option is not available to those withdrawing from an inherited account.
Let Us Know if You Have a Specific Question
Why Should I Consider Skipping RMDs in 2020?
The primary reason to consider skipping your RMDs for 2020? It will reduce your taxes. Money taken out in an RMD typically counts as income, so taking a regular RMD means you’d be on the hook for a higher tax bill. However, because many people are dealing with severe financial struggles, this is one way in which the government is looking to ease financial stress for retirees.
It's important to note that RMDs are based on “the account balance as of the end of the immediately preceding calendar year divided by a distribution period from the IRS’s ‘Uniform Lifetime Table,’” according to the IRS.3
In other words, your RMD would be determined based, in part, on the account balance as of December 31, 2019, when markets were strong and nearing a peak. We have since entered a bear market and are experiencing overall economic volatility. Waiting to take RMDs until 2021 gives you a chance to, hopefully, see your accounts regain some of the value they may have lost. So, withdrawing now would leave many retirees paying taxes on value that no longer exists in their accounts.
The CARES Act has presented retirees with a potentially advantageous opportunity. While the option to withdraw what you need from your retirement account is still available, you can now delay the RMD until 2021. If you have questions about whether or not to take advantage of this opportunity, talk to your financial advisor. Together, you can evaluate and readjust your retirement plan in accordance with these changes to the law.