The Coronavirus Aid, Relief and Economic Security Act (CARES Act), which was signed into law on March 27, contained many provisions to help Americans weather the COVID-19 pandemic. The $2 trillion aid package is far-reaching and included cash payments to many Americans, unemployment benefits, a postponement of the tax deadline to July 15, 2020, aid for big corporations, small businesses and state and local governments, and funds for public health and education. A provision of the CARES Act that is of particular importance to retirees includes the suspension of required minimum distributions (RMDs) for 2020.
The suspension applies to tax-deferred retirement accounts including 401(k)s, IRAs 403(b), 457 and other retirement plans that are normally subject to the mandatory distributions. Individuals who contribute to tax-deferred retirement accounts are eventually required to take distributions from those accounts so the IRS can collect taxes on the income. Individuals who turned 70½ after January 1, 2020 were required to take RMDs at age 72, and those who turned 70 ½ before December 31, 2019, were required to take them at 70½. Not taking the appropriate RMDs could result in a 50% penalty on the amount that should have been taken.
With the passage of the CARES Act, individuals do not have to take RMDs in 2020, regardless of their age. This also applies to beneficiaries with inherited tax-deferred or Roth IRA accounts. For individuals who already took their RMDs this year, the IRS has provided guidance for those who may want to put that money back into their accounts. This can provide a needed reprieve for those who did not want to sell depressed assets during a down market or pay taxes on the distributions this year. The suspension in RMDs also applies to individuals who delayed taking their first distribution at 70½ in 2019 and were planning on taking that first RMD before April 1, 2020.
In most cases, anyone who took an RMD would have 60 days to return the money into the account. In April, the IRS issued guidance via Notice 2020-23 allowing individuals taking distributions between February 1, 2020 and May 15, 2020 to put the money back in by July 15, 2020.(1) As of this writing, the 60-day deadline on RMDs received still applies for distributions taken in January of 2020 and after May 15, 2020.
There are some restrictions to the guidance including rollovers subject to the once-per-year IRA rollover rule. For example, anyone who has completed an IRA-to-IRA or Roth IRA-to-Roth IRA rollover within 365 days of taking their RMD would not qualify for the extension. It would be prudent to speak with a financial planner and tax advisor to get a full understanding of the available options when putting RMD funds back.
Though RMDs have been suspended for 2020, individuals can still take their planned withdrawals, and they will be treated as a taxed voluntary distribution. Under normal circumstances, RMDs are not eligible to be converted to a Roth IRA, but since the withdrawal is no longer considered an RMD, it can be converted.
The suspension of RMDs in 2020 has the potential to provide some needed relief and protect the savings of many older Americans during these uncertain times. And while this provision of the CARES Act will be beneficial to many, there are some restrictions individuals looking to take advantage of the suspension need to be aware of. Again, it is always wise to discuss these types of financial decisions with a financial planner and tax advisor prior to acting.
Authored by Dennis Culver, Insight Wealth Strategies.