The CARES Act Has Changed 2020 RMD Rules
When President Trump signed the Coronavirus Aid, Relief and Economic Security (CARES) Act on March 27, he enacted the largest aid package in American history.[i] One important impact is that Required Minimum Distributions (RMDs) for 2020 are, in essence, suspended. In this way, the federal government chose to sacrifice short-term tax revenue in order to provide immediate financial relief to retirees.
This change bears discussion, however, as there are many questions about what the CARES Act means for those who have already taken their 2020 RMDs, as well as any impact on taxes and inherited accounts.
Let’s begin with a review of the basic tenets of the RMD portion of this new law.
Understanding the CARES Act
This relief package allows defined contribution plans, including 401(k)s, 403(b)s, 457(b)s and IRAs to suspend 2020 RMD requirements. Now, RMD rates were already a bit lower since 2020 is the first year, per the SECURE Act[ii], in which the age change from 70.5 to 72 began, but skipping RMDs in 2020 altogether is a meaningful change. With so many Americans facing financial struggles due to the COVID-19 pandemic, the flexibility to opt-out of distribution means that retirement portfolios have more time to recover from the current market volatility.
Of course, those who rely on distributions for living expenses in retirement may still take them; they just won’t be required to do so.
What About Inherited Retirement Accounts?
Since the CARES Act is an aid package, rather than a technical tax bill, some interpretation will be necessary to understand what suspended RMDs means for those with inherited IRAs, 401(k)s or other retirement accounts typically subject to RMDs.
The language of the law suggests that it applies to any RMD from any individual retirement plan – and its purpose is to provide Americans with financial relief – so it likely applies to these accounts, too. However, further clarification will likely be required from the IRS.[i]
Impact on Those Who Already Took 2020 RMDs
Since the CARES act was signed into law in late March, many retirees had already taken their annual RMD. It appears these distributions will be taxable, as in a typical tax year, as there is no provision allowing otherwise. So, retirees in this group are most likely out of luck, with one caveat: if you took an RMD from your 401(k) or IRA within the last 60 days, you can execute a 60-day rollover to an IRA to prevent it from being considered a taxable 2020 distribution.[ii] Plan providers are not required to alert you to this option, so you may not receive any information about it unless you ask.
If you haven’t taken your 2020 RMD yet and you don’t need it for living expenses, but you have it set up automatically, it’s best to contact your plan provider and ensure your 2020 RMD will be suspended.
Impact on QCDs
Qualified Charitable Distribution (QCD) regulations allow those aged 70.5 or older to distribute up to $100,000 from their IRA to a qualified charitable organization. This amount can offset RMDs and won’t be treated as a taxable distribution. Although the SECURE Act changed the RMD age it 72, it still allowed QCDs to be made beginning at age 70.5, though they can’t offset distributions at this age since none are required.
With the CARES Act suspending RMDs, QCDs may still be made in 2020 but there is no provision allowing them to offset future RMDs.[iii]
The 10-Year Rule for Inherited Retirement Accounts
One of the most sweeping changes of the SECURE Act concerning RMDs was that it implemented a 10-year distribution rule for most beneficiaries of inherited IRAs and 401(k)s, replacing the former lifetime stretch provision. Inherited beneficiaries must now withdraw the entire account within ten years.
The CARES Act does not directly impact this rule, but the provision is not yet in effect for 2020. According to the SECURE Act, the 10-year period begins in the year after the passing of the account holder, so the earliest it would apply to any inherited account holder is January 1, 2021. If an account holder is subject to RMDs, one is still taken in the year of their death, though the CARES Act means this is not true for 2020. So, in effect, there are no RMDs – and no 10-year rule – for 2020.[iv]
The CARES Act is a relief measure – the largest in our history – and it is meant to provide direct financial assistance to Americans in a number of ways as we deal both individually and collectively with the fallout from the COVID-19 pandemic. Suspending RMDs for 2020 allows for more control over your retirement investments, while also removing the need to create a taxable event during a time of global crisis. If this 2020 RMD waiver applies to you, be sure to monitor any updates to this legislation and make plans for taking required distributions in 2021. Though RMD relief, taken alone, won’t fully accomplish making Americans feel more secure, it’s a widespread measure that will assist many retirees.
You can learn more about other aspects of the CARES Act here.
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