In March 2020, the Coronavirus Aid, Relief, and Economic Security (CARES) Act was passed. There are several components to the CARES Act that will impact many, if not all, Americans. This blog article focuses on how the CARES Act affects Required Minimum Distributions (RMDs). The CARES Act effectively waives RMDs from qualified retirement plans and IRAs for 2020, regardless of whether the taxpayer has been impacted by the Coronavirus pandemic.
The SECURE Act that passed in December 2019 changed the RMD beginning age from 70½ to 72, effective January 1, 2020. With the passage of the CARES Act, RMDs from qualified retirement plans and IRAs (including Inherited IRAs) are not required for 2020 allowing further income tax deferral, regardless of when you started, or when you were supposed to start, your RMDs.
The markets experienced a wave of volatility in the first quarter of 2020 and it is likely that your retirement plan may have decreased in value as a result. By taking a cash distribution to satisfy your RMD, it would mean potentially selling when asset levels are down, thus locking in a permanent loss. Since RMDs are not required this year, retirement accounts may have the opportunity to recover from the recent market volatility.
There are two key benefits to the waiver of RMDs for 2020: deferring income tax for another year and considering a Roth Conversion. For many individuals, the annual RMD is a significant portion of their taxable income. Without RMDs contributing to taxable income this year, financial planners have the opportunity to consider whether a Roth Conversion makes sense for a client. A Roth Conversion converts your tax-deferred investments to a Roth account so that the investments grow tax-deferred and distributions are tax-free. Taxpayers are responsible for income tax on the amount of the Roth Conversion, but the tax impact of a Roth Conversion may be smaller since taxable income is lower without the usual level of RMD income. At SFG, we will consider Roth Conversions on a client-by-client basis as a part of our tax planning process.
If you have already taken your RMD for 2020, then you may be able to reverse the transaction. You have until July 15, 2020 to put the funds back in your retirement account and it will be treated as a tax-free rollover (normally, tax-free rollovers must be completed within 60 days). RMDs taken from Inherited IRAs may not be reversed. Before trying to reverse a distribution you’ve already taken, you should consult your financial planner and tax advisor.
Even though RMDs are not required, you may still make Qualified Charitable Distributions (QCDs). QCDs are charitable donations made directly from IRAs. The IRA owner must be at least 70½ and QCDs are limited to $100,000. QCDs are not included in your income but is a way to reduce future tax liability by decreasing your retirement account balance.