Ep. 19: The CARES Act & RMDs
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Welcome back to Money Matters where I help guide you in becoming a better and more confident investor. I’ve been having a lot of conversation with our older client relationships about the CARES act and how that relate to their RMDs. I wanted to touch on that with you all so you know you’re making the best possible decision with your money in retirement.
The CARES act passed by congress is the Coronavirus Aid, Relief, and Economic Stimulus Act, which is waiving all RMDs (or required minimum distributions) due in 2020. This is reminiscent of the provisions enacted in 2009 during the financial crisis
RMD are the way for the government to get their taxes due on your account in the form of ordinary income tax. The tradeoff being that they give you tax-deferred growth potential for all the years you have the monies invested in the account until 70 ½ years old prior to 2020, and 72 years old going forward. The retiree must then withdraw the RMD amount each subsequent year based on the current RMD calculation. Which is where this act comes into play. Coming off the highs in 2019 of upwards of 30% returns based on your portfolio’s participation in the market, and then calculated by your life expectancy is how much you minimally required to take out of your account, which unless it’s sitting in cash mean you are going to have to sell some of your portfolios investments. And with what the pandemic has done to world markets that money having to come out at these low could really hurt your returns. However, on March 27, 2020, President Trump signed a $2 trillion coronavirus emergency stimulus package into law. It suspended required minimum distributions from retirement accounts in 2020. Which is a small victory for investors in retirement because this gives those accounts more time to recover from the slower economy, and retirees who can afford to leave them alone get the tax break of not being taxed on mandatory withdrawals.
The suspension applies to accounts of both original owners and those who inherited accounts. In other words, both lifetime and post-death RMDs are suspended. The rule seems simple, but can triggered questions among account owners. Some which I wanted to take some time to answer.
With people who turned 70 ½ in 2019 - Their first RMD is for the calendar year 2019, however the distribution was allowed to be delayed until April 1st, 2020. Under the CARES Act, if you took your RMD during 2019 then that’s that and there is no change, but if you didn’t take it in 2019 and instead opted to wait until 2020 for whatever reason, then the suspension applies and your first two years of RMDs are suspended.
Clients wonder how RMDs are going to be handled after 2020. Basically nothing will change going forward, you just forget about 2020 like it didn’t happen and as we go into 2021 RMDs schedule will go back to normal, calculated by the balance of your account at the end of 2020 which will be used to determine the 2021 RMD amount. You’ll divide the December 31, 2020, account balance by the applicable factor from the life expectancy table issued by the IRS, which gives you your RMD for 2021. You use the age that applies for you in 2021.
Some clients have asked if the CARES act suspend RMDs for IRAs inherited by non-spouses. Yes, the law waives all RMDs that would have been due in 2020, regardless of whether the RMDs were due to the original owner or a beneficiary who inherited the account. If you’ve been taking annual RMDs from an inherited IRA or other retirement account, you don’t have to take the RMD in 2020.
How does the CARES Act affect those who took all or part of their 2020 RMDs before the whole COVID-19 went down and the law took effect and those who didn’t want a distribution for the year?
You might be able to take advantage of the 60 day rule for rollovers. When you take a distribution from an IRA or other qualified retirement plans, you can avoid including the distribution in gross income if within 60 days you return the distribution to the same account or deposit it in another qualified retirement plan.
In a normal year, an RMD doesn’t qualify for a rollover. It can’t be rolled over to another plan or returned to the same account. But the CARES Act says that there are no RMDs for 2020. So, even if you took an RMD early in the year before the CARES Act, it now is not an RMD. It’s a regular distribution from the IRA (or other account) and is eligible to be rolled over to the same or another retirement plan.
To avoid taxes, the distribution has to be rolled over to a retirement account within 60 days of the initial distribution
The 60-day rollover isn’t available to beneficiaries of inherited IRAs. While the suspension of RMDs applies to them for 2020, they’re never eligible to do a rollover of a distribution, even a distribution that’s not an RMD. The suspension still applies for 2020, however they’re never eligible to do a rollover of a distribution. It’s good to point out that the 60-day rollover can be used only once per taxpayer every 12 months cycle, not calendar year – so it must be 12 months that has passed before you can do another one need be per IRA.
The potential good news is that the one-per-12-month limit applies only to rollovers from IRAs to IRAs. If you still have a 401(k) account or other qualified retirement plan, you can roll over the IRA distribution to a 401(k).
Another option is to roll over the distribution to a Roth IRA. You’ll have to include the distribution in gross income and pay income taxes on it. But the money now is in a tax-free account where you can invest it.
Normally you can’t do this. An RMD can’t be rolled over to a Roth IRA (or any other IRA). But a distribution that isn’t an RMD, which all distributions are in 2020, can be rolled over to the Roth IRA so that’s an option to for those who have no earned income in retirement, but may want to leave some tax free income to their children.
I hope this video helps with some of the RMD confusion dealing with the CARES act, further questions – shoot me an email or give me a call as I’m happy to help.
Thanks for watching and as always, thank you for giving your finances the attention that they deserve.
