Required minimum distributions (RMDs) have been waived for 2020 as a part of the COVID-19 relief contained in the CARES Act.
The waiver, while seemingly simple, can generate a number of questions—especially for clients who were not even subject to the RMD requirements in 2009, when RMDs were last waived. Clients with special circumstances may be especially confused over the impact of the 2020 RMD waiver. Those clients should be advised about how the RMD waiver will apply in their specific situation and what they need to do to take advantage of this important benefit—in addition to the ancillary planning opportunities that the waiver might have created.
RMD Basics & CARES Act Impact
As most clients know, the RMD rules set a date after which a retirement account owner must begin taking withdrawals from the account. For 2020, RMDs apply to anyone who was at least age 70 ½ years old by the end of 2019 (for future years, the SECURE Act increased the RMD beginning age to 72). Under normal circumstances, clients who turned 70 ½ in 2019 would have to take two distributions by December 31, 2020—their 2019 distribution, which is due by April 1, and their 2020 distribution, due by December 31.
The CARES Act waived all RMD obligations for 2020—clients who turned 70 ½ in 2019 can skip both distributions in 2020, clients who turned 70 ½ before 2019 can skip their distribution and account beneficiaries can skip their distributions. The waiver also applies to all types of accounts subject to the RMD rules—including 401(k)s, IRAs, 403(b) plans, SEP IRAs and even 457(b) plans. Defined benefit plans are not subject to the waiver (and Roth IRAs are not subject to the lifetime RMD rules to begin with).
Beneficiaries who are subject to the five-year distribution rules for inherited accounts do not have to count 2020—meaning that they will have six years to deplete the account funds.
This relief is important, because RMDs for any given year are calculated based on the account value at the end of the prior year—meaning that 2020 RMDs are calculated based on the account values as of December 31, 2019. Since that date, nearly every client has experienced a reduction in account values, meaning that the 2020 RMD would comprise a much larger portion of the overall account balance if withdrawn before the market rebounds.
Situations Where the 2020 RMD Waiver Does Not Apply
If a client who turned 70 ½ in 2019 elected to take the first RMD in 2019, the 2020 waiver does not apply. (Remember, clients who turned 70 ½ in 2020 have no 2020 RMD obligation because the SECURE Act increased the relevant age to 72—so these clients are not impacted.) Further, a non-spouse account beneficiary who took the RMD before the CARES Act waiver was announced is not eligible to roll the amounts back into an IRA.
Clients also have to remember the “one-IRA-rollover-per-year-rule.” In most cases, a client has 60 days from the date of distribution to rollover the funds into another IRA—i.e., they can redeposit the funds into a tax-preferred account to eliminate tax liability on the distribution. Clients can only do this once in a given 12-month period.
Clients who took their 2020 RMD in January 2020 do not currently have the option of rolling that RMD back into an IRA. Conversely, those who took 2020 RMDs in February or March, prior to enactment of the CARES Act, may have options. IRS guidance in Notice 2020-23 extends the 60-day rollover period to July 15, 2020 if the client would have been required to complete the rollover (to avoid taxation on the distribution) between April 1, 2020, and July 15 (the 60-day period would have expired by April 1 for any distributions taken before February).
Financial Planning Implications
Of course, clients are still permitted to take distributions from their accounts—and those distributions will be subject to tax. Under normal circumstances, RMDs cannot be converted to a Roth—because RMDs cannot be rolled over in the same manner as other distributions.
However, because distributions in 2020 are simply not treated as RMDs, clients interested in Roth conversions can take those amounts and convert them to a Roth to take advantage of lower tax rates for 2020. The client pays taxes on the amounts withdrawn, but at lower asset values and potentially lower tax rates.
Clients who have scheduled RMDs for 2020 (because they take their distributions periodically throughout the year) should also be advised of the need to cancel those distributions to take advantage of the waiver. The IRA rollover rules only allow a taxpayer to complete one IRA-to-IRA rollover in any 12-month period—meaning that the client will not be able to “undo” all taxable withdrawals if multiple distributions are taken.
Violating the one-rollover-per-year rule could subject the client to the penalty for excess contributions (a six-percent penalty on the excess, if that excess contribution is not corrected by the tax filing deadline).
The 2020 RMD waiver offers an important benefit to clients who can afford to forgo RMDs for a single year. All clients, however, should be apprised of the option and the potential consequences of any decision to either take or forgo 2020 RMDs.
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