April 23, 2020 | Read Time: 4 Minutes
President Trump signed the Coronavirus Aid, Relief, and Economic Security Act (CARES) Act on March 27, 2020. The House passed the bill by voice vote earlier that day, and the Senate unanimously passed it on March 25. The $2.2 trillion bipartisan bill, the most expensive legislation ever enacted, resulted from negotiations between Treasury Secretary Steven Mnuchin and Congressional leaders on both sides of the aisle. Tucked in the CARES Act was a provision that suspended the Required Minimum Distributions (RMD’s) for 2020.
You are required by law to take withdrawals from your IRA, SIMPLE IRA, SEP IRA, or retirement plan, such as a 401(k), 403(b), or 457 plan, once you reach age 72 (It was 70 ½ before 2020). The CARES Act waives RMD payments for 2020, including inherited IRA’s, both Traditional and Roth.
Additionally, the waiver covers the first RMD, which individuals may have delayed from 2019 until April 1st of 2020. You have until April 1st of the year following the required RMD age to take your first RMD payment. This deadline only applies to your first RMD for the first year. All subsequent RMD’s must be distributed by December 31st.
Since account values are likely down with the recent market correction, if you take out your RMD based on your December 31, 2019 account value, you are, in essence, distributing a larger percentage of your IRA or plan balance. It can be a huge benefit for retirees if they can afford to leave their investments alone for a year and let them recover from the market downturn. Please remember, you still have the flexibility to withdraw as much money as you need from your retirement accounts, you are just not required to do so.
The 2020 RMD waiver has brought about a nice planning opportunity. The Tax Cuts and Jobs Act passed in late 2018, significantly reduced tax rates for many individuals. Combine that with the recent decline in the market, as well as the current suspension of RMD’s, now may be an opportune time to consider doing Roth Conversions. In the year of conversion, the value of the amount you convert must be included in taxable income. The benefit of doing a Roth Conversion is that once converted, you will not pay taxes on those funds again, including earnings, if held in the account for at least five years and you are age 59 ½. Everyone’s situation is different so please consult with your tax advisor for more information.
If you have already taken your 2020 RMD and you do not need it, there is a second planning opportunity, but the clock is ticking. Once you take a distribution from your retirement account, you will owe no tax and it will not become taxable income to you if it is redeposited back into the account with 60 days. The 60-day window is extended to July 15 if it was to originally close between April 1 and May 15. This is considered a 60-day rollover and you cannot make more than one 60-day rollover in any 12-month period. If you have not made a 60-day rollover in the past 12-month period, it may be worthwhile to consider if you should roll the funds back into the account to avoid paying taxes. You could also roll the funds back into the account and then consider a Roth Conversion. Again, everyone’s particular situation is different, and the guidance we are receiving is ever-changing, so please consult with your tax advisor for more information.