The Coronavirus Aid, Relief, and Economic Security (CARES) Act, recently passed into law, includes a number of measures designed to stimulate the economy. One provision allows retirees to forgo taking Required Minimum Distributions (RMDs) from IRAs or other defined contribution plans, such as 401(k)-type plans this year.
RMD amounts are based on the value of the account at the end of the previous year. “Because most accounts have seen a steep decline in 2020, the amount of the required withdrawal would have been a much larger percentage of a retiree’s account,” explains Rob Williams, VP of financial planning, retirement income and wealth management at the Schwab Center for Financial Research (SCFR). “The new law lets retirees keep that money in their accounts, potentially recouping some of the market losses when the economy turns around.”
Hayden Adams, CPA, CFP®, and director of tax planning at SCFR, offers answers to some common questions retirees are asking about RMDs in light of the CARES Act:
1. Do retirees have to take RMDs from retirement accounts in 2020?
“No, all RMDs have been suspended for 2020,” says Hayden. This waiver includes any retirement account subject to RMDs, such as IRAs, 401(k)s, Roth 401(k)s and inherited accounts.
2. What age do I have to be in order to qualify for the waiver?
If you are subject to RMDs, the waiver applies to you regardless of age. It includes original account owners over age 70½ (or 72, under the SECURE Act), original account owners who turned 70½ in 2019 but have not taken their distribution yet, and inherited-IRA beneficiaries of any age (see number 3, below).
3. Does the waiver apply to inherited IRAs?
Yes. The waiver extends to inherited IRAs (including stretch IRAs), as Schwab interprets the law. Even inherited IRAs with non-spousal beneficiaries, which would normally need to be liquidated within 5 years of the original account-holder’s death, are not required to take a distribution in 2020. You should consult with your tax advisor, but Schwab’s interpretation is that beneficiaries have an extra year to fulfill the 5-year requirement, since RMDs can be skipped in 2020.
4. If I already took an RMD in 2020, can I reverse it?
“Technically, the distribution can’t be reversed,” says Hayden. “However, according to new guidance from the IRS in Notice 2020-51, you can re-contribute the amount back into your retirement account as long as you do it by August 31, 2020.” Unfortunately, you can’t reverse the tax withholding, but depending on other factors in your tax situation, the IRS could refund the withdrawal when your 2020 return is filed.
5. What if I took my 2020 RMD more than 60 days ago?
“Based this new guidance, it doesn’t matter if you took your RMD more than 60 days ago,” says Hayden. “All RMDs taken from January 1, 2020 up to August 31, 2020 can be re-contributed by the new deadline.”
6. If I took more than one RMD this year from my IRA, can I re-contribute all the RMDs?
“Normally you can only roll over or re-contribute one IRA distribution every rolling 12 month window,” says Hayden. “Notice 2020-51 changes this rule, at least temporarily.” Under this new guidance, the once per 12 month rollover rule has been suspended until after August 31, 2020. This means you can take all RMDs and roll them over or re-contribute the assets, so long as it’s before the deadline.
7. If I have an inherited IRA and already took an RMD for 2020, can I re-contribute the distribution?
Yes. Even RMDs from inherited IRAs are allowed to be rolled over or re-contributed to a retirement account, as long as it’s done before the August 31, 2020 deadline.
8. What happens after the August 31, 2020 deadline?
“It’s likely that after the deadline we will revert back to the normal rollover rules,” says Hayden. That means it’s likely that inherited account distributions will no longer be eligible for rollover, the 60 day rollover rule will once again kick in, and the once per 12 month IRA rule will also be back in effect. However, there will still be no RMD requirement for all of 2020.
9. Are defined benefit plans (such as pensions) also included in the RMD waiver?
“No, defined benefits plans are not included, so if you’re supposed to take distributions from a defined benefit (DB) plan you must continue to do so,” says Hayden.
10. Under Internal Revenue Code 72(t), I’m taking “substantially equal periodic payments” penalty-free from my retirement account. Does the RMD waiver apply to me?
No, it doesn’t appear the waiver covers this type of distribution. A substantially equal periodic payment is not the same as an RMD, which means you’ll have to continue to take those distributions.
One parting note: Consider these questions and answers an interpretation of the law—not personalized tax advice. For that, you should talk with a CPA or tax professional who is familiar with your particular situation.
1. Click here to read the relevant text of the bill.
2. Click here to read the relevant text of the bill.
3. It’s possible that a spouse who inherited a retirement account may be able to have a distribution qualify for a rollover. Speak to a tax professional if you fall into this particular situation to determine if your distribution is rollover-eligible.
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